WENDY'S INTERNATIONAL, INC. 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 1, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the transition period from to
Commission File Number 1-8116
WENDYS INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
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Ohio
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31-0785108 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification Number) |
P.O. Box 256, 4288 West Dublin-Granville Road, Dublin, Ohio 43017-0256
(Address of principal executive offices) (Zip code)
(Registrants telephone number, including area code) 614-764-3100
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act (Check one):
Large Accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ.
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Class
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Outstanding at May 7, 2007 |
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Common shares, $.10 stated value
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87,253,000 shares |
Exhibit index on page 27. |
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WENDYS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
2
WENDYS INTERNATIONAL, INC. AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
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(In thousands, except per share data) |
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Quarter Ended |
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Quarter Ended |
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April 1, 2007 |
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April 2, 2006 |
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Revenues |
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Sales |
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$ |
522,944 |
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$ |
513,435 |
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Franchise revenues |
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67,220 |
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65,243 |
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590,164 |
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578,678 |
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Costs and expenses |
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Cost of sales |
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324,061 |
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329,724 |
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Company restaurant operating costs |
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152,388 |
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149,917 |
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Operating costs |
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3,935 |
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19,811 |
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Depreciation of property and equipment |
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28,052 |
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31,109 |
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General and administrative expenses |
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50,822 |
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55,297 |
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Other (income) expense, net |
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2,349 |
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(6,602 |
) |
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Total costs and expenses |
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561,607 |
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579,256 |
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Operating income (loss) |
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28,557 |
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(578 |
) |
Interest expense |
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(12,207 |
) |
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(9,033 |
) |
Interest income |
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5,416 |
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2,033 |
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Income (loss) from continuing operations before income taxes |
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21,766 |
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(7,578 |
) |
Income tax expense (benefit) |
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7,285 |
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(1,681 |
) |
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Income (loss) from continuing operations |
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14,481 |
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(5,897 |
) |
Income from discontinued operations |
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206 |
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57,129 |
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Net income |
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$ |
14,687 |
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$ |
51,232 |
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Basic earnings (loss) per common share from continuing operations |
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$ |
.15 |
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$ |
.(05 |
) |
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Diluted earnings (loss) per common share from continuing operations |
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$ |
.15 |
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$ |
(.05 |
) |
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Basic earnings per common share from discontinued operations |
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$ |
.00 |
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$ |
.50 |
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Diluted earnings per common share from discontinued operations |
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$ |
.00 |
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$ |
.50 |
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Basic earnings per common share |
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$ |
.15 |
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$ |
.45 |
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Diluted earnings per common share |
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$ |
.15 |
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$ |
.45 |
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Dividends
declared and paid per common share |
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$ |
.085 |
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$ |
.17 |
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Basic shares |
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94,605 |
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114,722 |
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Diluted shares |
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95,706 |
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116,397 |
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The accompanying Notes are an integral part of the Consolidated Condensed Financial
Statements.
3
WENDYS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
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(Dollars in thousands) |
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April 1, 2007 |
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December 31, 2006 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
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$ |
196,149 |
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$ |
457,614 |
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Accounts receivable, net |
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74,265 |
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84,841 |
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Deferred income taxes |
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25,167 |
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29,651 |
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Inventories and other |
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28,848 |
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30,252 |
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Advertising fund restricted assets |
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53,006 |
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36,207 |
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Assets held for disposition |
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12,034 |
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15,455 |
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Current assets of discontinued operations |
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3,879 |
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2,712 |
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393,348 |
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656,732 |
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Property and equipment |
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2,039,836 |
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2,024,715 |
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Accumulated depreciation |
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(814,888 |
) |
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(798,387 |
) |
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1,224,948 |
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1,226,328 |
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Goodwill |
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85,384 |
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85,353 |
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Deferred income taxes |
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4,552 |
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4,316 |
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Intangible assets, net |
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3,454 |
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3,855 |
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Other assets |
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86,178 |
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82,738 |
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Non current assets of discontinued operations |
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1,075 |
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1,025 |
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$ |
1,798,939 |
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$ |
2,060,347 |
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The accompanying Notes are an integral part of the Consolidated Condensed Financial
Statements.
4
WENDYS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
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(Dollars in thousands) |
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April 1, 2007 |
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December 31, 2006 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
82,743 |
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$ |
93,465 |
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Accrued expenses: |
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Salaries and wages |
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31,378 |
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47,329 |
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Taxes |
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24,198 |
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46,138 |
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Insurance |
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58,232 |
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57,353 |
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Other |
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55,380 |
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32,199 |
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Advertising fund restricted liabilities |
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53,006 |
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28,568 |
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Current portion of long-term obligations |
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89,206 |
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87,396 |
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Current liabilities of discontinued operations |
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1,590 |
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2,218 |
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395,733 |
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394,666 |
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Long-term obligations |
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Term debt |
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521,296 |
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537,139 |
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Capital leases |
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19,017 |
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18,963 |
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540,313 |
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556,102 |
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Deferred income taxes |
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30,123 |
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30,220 |
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Other long-term liabilities |
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87,746 |
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|
66,163 |
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Non current liabilities of discontinued operations |
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1,445 |
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|
1,519 |
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Commitments and contingencies |
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Shareholders equity |
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Preferred stock, Authorized: 250,000 shares |
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Common stock, $.10 stated value per share, |
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Authorized: 200,000,000 shares, |
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Issued: 129,730,000 and 129,548,000 shares, respectively |
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12,973 |
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12,955 |
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Capital in excess of stated value |
|
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1,095,963 |
|
|
|
1,089,825 |
|
Retained earnings |
|
|
1,247,955 |
|
|
|
1,241,489 |
|
Accumulated other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Cumulative translation adjustments and other |
|
|
10,146 |
|
|
|
9,100 |
|
Pension liability |
|
|
(21,776 |
) |
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(22,546 |
) |
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|
|
|
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|
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2,345,261 |
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2,330,823 |
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Treasury stock at cost: |
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42,844,000 and 33,844,000 shares, respectively |
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(1,601,682 |
) |
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|
(1,319,146 |
) |
|
|
|
|
|
|
|
|
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|
743,579 |
|
|
|
1,011,677 |
|
|
|
|
|
|
|
|
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$ |
1,798,939 |
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|
$ |
2,060,347 |
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|
The accompanying Notes are an integral part of the Consolidated Condensed Financial
Statements.
5
WENDYS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
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(In thousands) |
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Quarter Ended |
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Quarter Ended |
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|
April 1, 2007 |
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April 2, 2006 |
|
Net cash provided by (used in) operating activities from continuing operations |
|
$ |
55,120 |
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|
$ |
(15,941 |
) |
Net cash provided by (used in) operating activities from discontinued operations |
|
|
(204 |
) |
|
|
(9,670 |
) |
|
|
|
|
|
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|
Net cash provided by (used in) operating activities |
|
|
54,916 |
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|
(25,611 |
) |
|
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Cash flows from investing activities |
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|
|
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Proceeds from property dispositions |
|
|
5,228 |
|
|
|
37,716 |
|
Capital expenditures |
|
|
(23,972 |
) |
|
|
(41,125 |
) |
Other investing activities |
|
|
(738 |
) |
|
|
(1,608 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities from continuing operations |
|
|
(19,482 |
) |
|
|
(5,017 |
) |
Net cash used in investing activities from discontinued operations |
|
|
(55 |
) |
|
|
(34,178 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(19,537 |
) |
|
|
(39,195 |
) |
|
|
|
|
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|
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|
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|
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Cash flows from financing activities |
|
|
|
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|
|
|
Proceeds from issuance of debt, net of issuance costs |
|
|
0 |
|
|
|
34,996 |
|
Excess stock-based compensation tax benefits |
|
|
734 |
|
|
|
11,098 |
|
Proceeds from employee stock options exercised |
|
|
2,572 |
|
|
|
48,741 |
|
Repurchase of common stock |
|
|
(282,524 |
) |
|
|
(220,063 |
) |
Principal payments on debt obligations |
|
|
(8,348 |
) |
|
|
(35,635 |
) |
Dividends paid on common shares |
|
|
(8,136 |
) |
|
|
(19,744 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities from continuing operations |
|
|
(295,702 |
) |
|
|
(180,607 |
) |
Net cash provided by financing activities from discontinued operations |
|
|
0 |
|
|
|
1,159,947 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(295,702 |
) |
|
|
979,340 |
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash from continuing operations |
|
|
82 |
|
|
|
(21 |
) |
Effect of exchange rate changes on cash from discontinued operations |
|
|
0 |
|
|
|
(328 |
) |
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(260,241 |
) |
|
|
914,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
457,614 |
|
|
|
230,560 |
|
Add: Cash and cash equivalents of discontinued operations at beginning of period |
|
|
2,273 |
|
|
|
162,681 |
|
Net (decrease) increase in cash and cash equivalents |
|
|
(260,241 |
) |
|
|
914,185 |
|
Less: Cash and cash equivalents of discontinued operations at end of period |
|
|
(3,497 |
) |
|
|
(839,887 |
) |
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
196,149 |
|
|
$ |
467,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
Interest paid from continuing operations |
|
$ |
508 |
|
|
$ |
708 |
|
Interest paid from discontinued operations |
|
|
0 |
|
|
|
5,869 |
|
Income taxes (refunded) paid |
|
|
(10,579 |
) |
|
|
62,615 |
|
Capitalized lease obligations incurred from continuing operations |
|
|
543 |
|
|
|
1,432 |
|
Capitalized lease obligations incurred from discontinued operations |
|
|
0 |
|
|
|
982 |
|
The accompanying Notes are an integral part of the Consolidated Condensed Financial Statements.
6
WENDYS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 MANAGEMENTS STATEMENT
In the opinion of management, the accompanying Consolidated Condensed Financial Statements contain
all adjustments (all of which are normal and recurring in nature) necessary for a fair statement of
the condensed financial position of Wendys International, Inc. and subsidiaries (the Company) as
of April 1, 2007 and December 31, 2006, and the condensed results of operations and comprehensive
income (see Note 7) for the quarters ended April 1, 2007 and April 2, 2006 and condensed cash flows
for the quarters ended April 1, 2007 and April 2, 2006. All of these financial statements are
unaudited. These Consolidated Condensed Financial Statements should be read in conjunction with the
Consolidated Financial Statements contained in the Companys 2006 Form 10-K. The December 31, 2006
Consolidated Condensed Balance Sheet was derived from the audited Consolidated Financial Statements
contained in the Companys 2006 Form 10-K, but does not include all disclosures required by
accounting principles generally accepted in the United States of America.
On September 29, 2006, the Company completed the spin-off of its remaining 82.75% ownership in Tim
Hortons Inc. (THI), the parent company of the business previously reported as the Hortons
segment. Accordingly, the results of operations of THI are reflected as discontinued operations for
all periods presented. In addition, on November 28, 2006, the Company completed the sale of Baja
Fresh and, accordingly, its results of operations are reflected as discontinued operations for all
periods presented. On October 9, 2006, the Companys Board of Directors approved the future sale
of Cafe Express and, accordingly, the results of operations and assets and liabilities of Cafe
Express are reflected as discontinued operations for all periods presented (see Note 6). Baja
Fresh and Cafe Express were previously reported as the Developing Brands segment.
NOTE 2 NET INCOME PER SHARE
Basic earnings per common share are computed by dividing net income available to common
shareholders by the weighted average number of common shares outstanding. Diluted computations are
based on the treasury stock method and include assumed conversions of stock options and restricted
stock and restricted stock units (together restricted shares), when outstanding and dilutive.
There were no options excluded from the computation of diluted earnings per common share for the
quarters ended April 1, 2007 and April 2, 2006 as they were all dilutive. Due to the loss from
continuing operations for the quarter ended April 2, 2006, basic shares are used for both basic and
diluted earnings per share calculations.
The computations of basic and diluted earnings per common share are shown below:
|
|
|
|
|
|
|
|
|
(In thousands, except per share data) |
|
Quarter Ended |
|
|
|
April 1, 2007 |
|
|
April 2, 2006 |
|
Income (loss) from continuing operations for computation of basic
and diluted earnings per common share |
|
$ |
14,481 |
|
|
$ |
(5,897 |
) |
Income from discontinued operations for computation of basic and
diluted earnings per common share |
|
$ |
206 |
|
|
$ |
57,129 |
|
|
|
|
|
|
|
|
Net income for computation of basic and diluted earnings per
common share |
|
$ |
14,687 |
|
|
$ |
51,232 |
|
|
|
|
|
|
|
|
Weighted average shares for computation of basic earnings per
common share |
|
|
94,605 |
|
|
|
114,722 |
|
Effect of dilutive stock options and restricted shares |
|
|
1,101 |
|
|
|
1,675 |
|
|
|
|
|
|
|
|
Weighted average shares for computation of diluted earnings per
common share |
|
|
95,706 |
|
|
|
116,397 |
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share from continuing operations |
|
$ |
.15 |
|
|
$ |
(.05 |
) |
Basic earnings per common share from discontinued operations |
|
$ |
.00 |
|
|
$ |
.50 |
|
|
|
|
|
|
|
|
Total basic earnings per common share |
|
$ |
.15 |
|
|
$ |
.45 |
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per common share from continuing operations |
|
$ |
.15 |
|
|
$ |
(.05 |
) |
Diluted earnings per common share from discontinued operations |
|
$ |
.00 |
|
|
$ |
.50 |
|
|
|
|
|
|
|
|
Total diluted earnings per common share |
|
$ |
.15 |
|
|
$ |
.45 |
|
|
|
|
|
|
|
|
7
NOTE 3 STOCK-BASED COMPENSATION
The Company recorded the following stock compensation expense:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
(In thousands) |
|
April 1, 2007 |
|
April 2, 2006 |
Continuing operations: |
|
|
|
|
|
|
|
|
Before-tax |
|
$ |
2,720 |
|
|
$ |
604 |
|
After-tax |
|
|
1,692 |
|
|
|
376 |
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
Before-tax |
|
|
40 |
|
|
|
1,041 |
|
After-tax |
|
|
25 |
|
|
|
648 |
|
|
|
|
|
|
|
|
|
|
Total: |
|
|
|
|
|
|
|
|
Before-tax |
|
$ |
2,760 |
|
|
$ |
1,645 |
|
After-tax |
|
|
1,717 |
|
|
|
1,024 |
|
The increase in stock compensation expense recognized in continuing operations in the quarter
ending April 1, 2007 compared to the quarter ending April 2, 2006 is primarily attributed to a
pretax adjustment of $1.7 million ($1.1 million after tax) to correct cumulative compensation
expense recorded in the first quarter of 2006 as well as additional awards granted after the first
quarter of 2006. The decrease in stock compensation expense recognized in discontinued operations
in the quarter ending April 1, 2007 compared to the quarter ending April 2, 2006 is primarily due
to the absence of expense related to THI and Baja Fresh in 2007.
On April 26, 2007, the Companys shareholders approved the 2007 Stock Incentive Plan (the 2007
Plan), which provides for equity compensation awards in the form of stock options, restricted
stock, restricted stock units, stock appreciation rights, dividend equivalent rights, performance
shares, performance units and share awards (collectively, Awards) to eligible employees and
directors of the Company or its subsidiaries. The 2007 Plan authorizes up to six million common
shares for grants of Awards. The common shares offered under the 2007 Plan may be authorized but
unissued shares, treasury shares or any combination thereof. The Company intends to use the 2007
Plan to issue annual stock option grants and long-term performance unit awards beginning in 2007.
The Company expects that approximately 50% of the value of Awards made in 2007 and subsequent years
will be comprised of stock options, with the remaining 50% of the value comprised of performance
awards.
NOTE 4 OTHER (INCOME) EXPENSE, NET
The following represents the components of other (income) expense, net on the Consolidated
Condensed Statements of Income for each of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
(In thousands) |
|
April 1, 2007 |
|
|
April 2, 2006 |
|
Restructuring costs |
|
$ |
1,031 |
|
|
$ |
0 |
|
Store closure costs |
|
|
3,821 |
|
|
|
775 |
|
Equity investment income |
|
|
(2,308 |
) |
|
|
(152 |
) |
Rent revenue |
|
|
0 |
|
|
|
(4,283 |
) |
Net gain from property dispositions |
|
|
(473 |
) |
|
|
(4,077 |
) |
Other, net |
|
|
278 |
|
|
|
1,135 |
|
|
|
|
|
|
|
|
Other (income) expense, net |
|
$ |
2,349 |
|
|
$ |
(6,602 |
) |
|
|
|
|
|
|
|
Rent revenues for the quarter ended April 2, 2006 represent rent paid by THI to a 50/50
restaurant real estate joint venture between Wendys and THI. After the spin-off of THI and in
accordance with accounting principles generally accepted in the United States, this joint venture
is no longer consolidated in the Companys financial statements and Wendys 50% share of the joint
venture income is included in other (income) expense, net as equity investment income for the
quarter ended April 1, 2007. See Notes 10 and 11 for discussion of store closure costs and
restructuring costs, respectively.
NOTE 5 INCOME TAXES
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes¾an interpretation of FASB Statement No. 109,
Accounting for Income Taxes (FIN 48). FIN 48 addresses the determination of whether tax
benefits claimed or expected to be claimed on a tax return should be recorded in
8
the financial statements. Under FIN 48, the Company may recognize the tax benefit from an
uncertain tax position only if it is more likely than not that the tax position will be sustained
on examination by the taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position should be measured based on
the largest benefit that has a greater than fifty percent likelihood of being realized upon
ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and
penalties on income taxes, accounting in interim periods and requires increased disclosures.
The Company adopted the provisions of FIN 48 on January 1, 2007. There was no cumulative effect
adjustment to retained earnings required related to the adoption of FIN 48. However, certain
amounts have been reclassified in the Consolidated Condensed Balance Sheets in order to comply with
the requirements of the statement. The amount of unrecognized tax
benefits at January 1, 2007 was
approximately $23.1 million, all of which would impact the Companys effective tax rate, if
recognized.
The Internal Revenue Service (IRS) is conducting an examination of the Companys U.S. federal
income tax returns for the year 2005 and the 2006 and 2007 years as part of the IRSs Compliance
Assurance Process program. The Company is before the IRS Appeals Division for the years 1998
through 2004 as it relates to a refund claim for the work-opportunity tax credit. The Company is
before the U.S. Competent Authority for the years 1999 through 2001 as it relates to transfer
pricing on royalties and fees between U.S. and Canada. Amounts related to IRS examinations of
federal income tax returns for 2004 and prior years have been settled and paid.
State
income tax returns are generally subject to examination for a period
of three to five years after
filing of the respective return. The Company has various state income tax returns in the process
of examination, administrative appeals or litigation.
The Company recognizes accrued interest and penalties associated with uncertain tax positions as
part of the income tax provision. As of January 1, 2007, the Company had approximately $7.1
million of accrued interest and penalties.
There was no material change in the amount of unrecognized tax benefits in the quarter ended April
1, 2007. The Company expects that approximately $1.4 million of its liability for unrecognized tax
benefits will be settled in the next 12 months. It is possible that the amount of unrecognized tax
benefits could change in the next 12 months; however the Company does not expect the change to have
a significant impact on its results of operations or financial position.
The effective income tax rate from continuing operations for the quarter ended April 1, 2007 was
33.5%, compared to 22.2% for the comparative period ended April 2, 2006. Income tax expense for
both periods was impacted by several discrete items that reduced the effective rate.
NOTE 6 DISCONTINUED OPERATIONS
THI
On September 29, 2006, the Company completed the distribution of its remaining 82.75% ownership in
THI. The distribution took place in the form of a pro rata common stock dividend to Wendys
shareholders whereby each shareholder received 1.3542759 shares of THI common stock for each share
of Wendys common stock held.
The table below presents the significant components of THI operating results included in income
from discontinued operations for the quarter ended April 2, 2006. THI represented the Hortons
segment prior to the spin-off.
|
|
|
|
|
|
|
Quarter Ended |
|
(In thousands) |
|
April 2, 2006 |
|
Revenues |
|
$ |
319,023 |
|
|
|
|
|
Income before income taxes |
|
|
72,239 |
|
Income tax expense |
|
|
10,725 |
|
Minority interest expense |
|
|
494 |
|
|
|
|
|
Income from discontinued operations, net of tax |
|
$ |
61,020 |
|
|
|
|
|
Income tax expense for THI in the first quarter of 2006 was lowered primarily by $7.0 million due
to the release of deferred Canadian withholding taxes and state income taxes on unremitted foreign
earnings and $3.8 million due to permanent differences for fair value losses on certain foreign
currency contracts that were deductible for tax purposes but not for book purposes.
9
Developing Brands
On November 28, 2006, the Company completed the sale of Baja Fresh and also in the fourth quarter
of 2006, the Companys Board of Directors approved the future sale of Cafe Express. Both of these
businesses historically comprised the Developing Brands segment. Accordingly, the results of
operations of Baja Fresh and Cafe Express are reflected as discontinued operations for all periods
presented. In addition, the assets and liabilities of Cafe Express were held for sale at April 1,
2007 and December 31, 2006 and are presented as current and non-current assets and liabilities from
discontinued operations. The sale of Baja Fresh is subject to certain working capital adjustments
which have not yet been finalized. The impact of any such adjustments is not expected to have a
material impact on the Company.
The table below presents the significant components of Baja Fresh and Cafe Express operating
results included in income from discontinued operations for the quarter ended April 1, 2007 and
April 2, 2006.
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
(In thousands) |
|
April 1, 2007 |
|
April 2, 2006 |
|
|
|
Revenues |
|
$ |
8,350 |
|
|
$ |
48,024 |
|
|
|
|
Income (loss) before income taxes |
|
|
331 |
|
|
|
(6,280 |
) |
Income tax expense (benefit) |
|
|
125 |
|
|
|
(2,389 |
) |
|
|
|
Income (loss) from discontinued operations, net of tax |
|
$ |
206 |
|
|
$ |
(3,891 |
) |
|
|
|
The assets and liabilities of Cafe Express are reflected as discontinued operations in the
Consolidated Condensed Balance Sheets as of April 1, 2007 and December 31, 2006 and are comprised
of the following:
|
|
|
|
|
|
|
|
|
(In thousands) |
|
April 1, 2007 |
|
December 31, 2006 |
|
|
|
Cash |
|
$ |
3,497 |
|
|
$ |
2,273 |
|
Accounts receivable, net |
|
|
117 |
|
|
|
124 |
|
Inventories and other |
|
|
265 |
|
|
|
315 |
|
|
|
|
Total current assets |
|
$ |
3,879 |
|
|
$ |
2,712 |
|
|
|
|
Property and equipment, net |
|
$ |
408 |
|
|
$ |
350 |
|
Intangible assets, net |
|
|
180 |
|
|
|
180 |
|
Other non-current assets |
|
|
487 |
|
|
|
495 |
|
|
|
|
Total non-current assets |
|
$ |
1,075 |
|
|
$ |
1,025 |
|
|
|
|
Accounts payable |
|
$ |
910 |
|
|
$ |
1,476 |
|
Accrued liabilities |
|
|
680 |
|
|
|
742 |
|
|
|
|
Total current liabilities |
|
$ |
1,590 |
|
|
$ |
2,218 |
|
|
|
|
Other non-current liabilities |
|
$ |
1,445 |
|
|
$ |
1,519 |
|
|
|
|
Total non-current liabilities |
|
$ |
1,445 |
|
|
$ |
1,519 |
|
|
|
|
On
February 28, 2007, in accordance with the terms of the
partnership agreement, Wendys acquired, at no cost,
the remaining 30% of equity of Cafe Express. The Company now owns 100% of Cafe Express.
10
NOTE 7 CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
The components of other comprehensive income and total comprehensive income are shown below:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
(In thousands) |
|
April 1, 2007 |
|
|
April 2, 2006 |
|
Net income |
|
$ |
14,687 |
|
|
$ |
51,232 |
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
Translation adjustments, net of tax |
|
|
1,046 |
|
|
|
(20 |
) |
Cash flow hedges: |
|
|
|
|
|
|
|
|
Net change in fair value
of derivatives, net of tax |
|
|
0 |
|
|
|
(6,112 |
) |
Amounts realized in earnings
during the period, net of tax |
|
|
0 |
|
|
|
6,801 |
|
|
|
|
|
|
|
|
Total cash flow hedges |
|
|
0 |
|
|
|
689 |
|
|
|
|
|
|
|
|
Pension liability (net of tax of
$467 for the quarter ended April 1,
2007) |
|
|
770 |
|
|
|
0 |
|
|
|
|
|
|
|
|
Total other comprehensive income |
|
|
1,816 |
|
|
|
669 |
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
16,503 |
|
|
$ |
51,901 |
|
|
|
|
|
|
|
|
There was a slight strengthening in the Canadian dollar from the beginning of the first
quarter of 2007 to the end of the first quarter of 2007 and a slight weakening in the Canadian
dollar from the beginning of the first quarter of 2006 to the end of the first quarter of 2006.
Offsetting the first quarter 2006 weakening in the Canadian dollar was a $2.3 million gain, net of
taxes of $1.3 million, related to the Companys hedge of certain net investment positions. This
gain was included in the first quarter 2006 translation adjustments component of other
comprehensive income. At the end of the first quarter 2007, the Canadian exchange rate was $1.15
versus $1.17 at December 31, 2006. At the end of the first quarter 2006, the Canadian exchange rate
was $1.17 versus $1.16 at January 1, 2006.
NOTE 8 CASH FLOWS
In order to maintain comparability between periods, intercompany cash flows have been eliminated
from the appropriate cash flow lines in the Companys Consolidated Condensed Statements of Cash
Flows. During first quarter 2007, intercompany cash flows included
net cash payments of $1.5
million from Wendys to Cafe Express for intercompany trade payables and taxes. These payments have
been eliminated as a cash outflow from continuing operations operating activities and as a cash
inflow from discontinued operations operating activities, respectively.
During first quarter 2006, intercompany cash flows were comprised of $427.4 million in net cash
payments made by THI to Wendys for payment of an intercompany note from Wendys. The $427.4
million payment has been eliminated as a cash outflow from discontinued operations financing
activities and as a cash inflow from continuing operations financing activities, respectively.
Intercompany cash flows also included payments made by THI to Wendys totaling $13.4 million in
intercompany interest and intercompany trade payables. These payments have been eliminated as a
cash outflow from discontinued operations operating activities and as a cash inflow from
continuing operations operating activities, respectively.
Intercompany cash flows for first quarter 2006 also included net cash payments from Wendys to Baja
Fresh for $2.2 million for intercompany trade payables. These payments have been eliminated as a
cash outflow from continuing operations operating activities and as a cash inflow from
discontinued operations operating activities, respectively.
NOTE 9 GOODWILL AND OTHER INTANGIBLE ASSETS
The table below presents amortizable intangible assets as of April 1, 2007 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1, 2007 |
|
|
December 31, 2006 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
(In thousands) |
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and trademarks |
|
$ |
452 |
|
|
$ |
(452 |
) |
|
$ |
0 |
|
|
$ |
452 |
|
|
$ |
(424 |
) |
|
$ |
28 |
|
Purchase options |
|
|
7,500 |
|
|
|
(6,973 |
) |
|
|
527 |
|
|
|
7,500 |
|
|
|
(6,680 |
) |
|
|
820 |
|
Other |
|
|
4,958 |
|
|
|
(2,031 |
) |
|
|
2,927 |
|
|
|
4,956 |
|
|
|
(1,949 |
) |
|
|
3,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,910 |
|
|
$ |
(9,456 |
) |
|
$ |
3,454 |
|
|
$ |
12,908 |
|
|
$ |
(9,053 |
) |
|
$ |
3,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Included in other above is $2.8 million and $2.9 million as of April 1, 2007 and December 31,
2006, respectively, net of accumulated amortization of
$2.0 million and $1.9 million, respectively,
primarily related to the use of the name and likeness of Dave Thomas, the late founder of Wendys.
Total intangibles amortization expense was $0.4 million and $0.3 million for the quarters ended
April 1, 2007 and April 2, 2006 respectively. The estimated annual intangibles amortization
expense for the years 2008 through 2012 is less than $0.5 million.
Goodwill was $85,384 and $85,353 at April 1, 2007 and December 31, 2006, respectively. The change
in goodwill represents translation adjustments on Canadian dollar denominated goodwill.
NOTE 10 FIXED ASSET DISPOSITIONS AND IMPAIRMENTS
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, the Company has classified assets with a net book
value of $12.0 million and $15.5 million as assets held for disposition in the Consolidated
Condensed Balance Sheets as of April 1, 2007 and December 31, 2006, respectively. The assets are no
longer being depreciated and have been classified as held for disposition based on the Companys
intention to sell these assets within the next 12 months. At April 1, 2007, the net book value of
assets held for disposition includes $8.5 million of land and $3.5 million of buildings and
leasehold improvements.
During the quarter ended April 1, 2007, the Company sold nine sites classified as held for
disposition at December 31, 2006, with a net book value of $3.8 million, for a net gain of $1.4
million, of which $1.1 million is classified as other (income) expense, net and $0.3 million is
classified in franchise revenues on the Consolidated Condensed Statements of Income. During the
first quarter of 2007, one additional site with a net book value of $0.5 million was designated as
held for disposition.
During the first quarter of 2007 and 2006, the Company incurred $3.8 million and $0.8 million,
respectively, of store closing and asset impairment charges, which are included in other (income)
expense, net on the Consolidated Condensed Statements of Income. Store closing costs primarily
consist of lease termination costs and equipment write-offs.
NOTE 11 RESTRUCTURING RESERVES
In 2006, the
Company accrued restructuring costs related to its voluntary enhanced retirement plan and reduction
in force and accrued professional fees and other costs as part of a cost reduction plan. Most
of these costs were paid in 2006.
The table below presents a reconciliation of the beginning and ending restructuring liabilities
(included in accrued expenses other) at December 31, 2006 and April 1, 2007, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Enhanced |
|
|
Reduction |
|
|
Professional |
|
|
|
|
(In thousands) |
|
Retirement |
|
|
in Force |
|
|
Fees |
|
|
Total |
|
Balance at December 31, 2006 |
|
$ |
18 |
|
|
$ |
6,498 |
|
|
$ |
141 |
|
|
$ |
6,657 |
|
Expensed during the period |
|
|
0 |
|
|
|
463 |
|
|
|
585 |
|
|
|
1,048 |
|
Paid during the period |
|
|
0 |
|
|
|
(3,819 |
) |
|
|
(711 |
) |
|
|
(4,530 |
) |
Adjustments |
|
|
(18 |
) |
|
|
998 |
|
|
|
0 |
|
|
|
980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 1, 2007 |
|
$ |
0 |
|
|
$ |
4,140 |
|
|
$ |
15 |
|
|
$ |
4,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the restructuring liabilities accrued in 2006, in the first quarter of 2007,
the Company accrued an additional $0.5 million of severance costs and $0.6 million of professional
fees primarily related to relocation costs and outplacement services. The adjustments in the table
above primarily reflect the reclassification of certain severance liabilities from long-term to
current liabilities. As of April 1, 2007, all amounts related to this
cost reduction plan are classified as current liabilities.
The 2007 restructuring costs are presented in the other (income) expense, net line on the
Consolidated Condensed Statements of Income (see also Note 4).
NOTE 12 CHANGES IN SHAREHOLDERS EQUITY
In March 2007, 9.0 million common shares were repurchased under an accelerated share repurchase
(ASR) transaction for an initial value of $282.5 million. The initial price paid as part of the
ASR transaction was $31.33 per share plus certain other costs. The repurchased shares are also
subject to a future contingent-purchase price adjustment based upon the weighted average price
during the period from the repurchase date until settlement, which is expected to occur in the
second or third quarter of 2007. The price adjustment is subject to a cap and a floor. The ASR
agreement included the option to settle the contract in cash or
12
shares of the Companys common stock and, accordingly, the contract was treated as an equity
transaction. The initial purchase price of $282.5 million was reflected in the treasury stock
component of shareholders equity in the first quarter of 2007. Any additional amounts paid due to
the future contingent-purchase price adjustment will not impact the income statement but will be
reflected in the treasury stock component of shareholders equity.
NOTE 13 GUARANTEES AND INDEMNIFICATIONS
The Company has guaranteed certain lease and debt payments primarily related to franchisees,
amounting to $166.6 million for the continuing Wendys business. In the event of default by a
franchise owner, the Company generally retains the right to acquire possession of the related
restaurants. The Company is contingently liable for certain leases amounting to $20.8 million.
These leases have been assigned to unrelated third parties, who have agreed to indemnify the
Company against future liabilities arising under the leases. These leases expire on various dates
through 2022. The Company is also the guarantor on $6.5 million in letters of credit with various
parties; however, management does not expect any material loss to result from these instruments
because it does not believe performance will be required. The length of the lease, loan and other
arrangements guaranteed by the Company or for which the Company is contingently liable varies, but
generally does not exceed 20 years.
In addition to the guarantees described above, the Company is party to many agreements executed in
the ordinary course of business that provide for indemnification of third parties under specified
circumstances, such as lessors of real property leased by the Company, distributors, service
providers for various types of services (including commercial banking, investment banking, tax,
actuarial and other services), software licensors, marketing and advertising firms, securities
underwriters and others. Generally, these agreements obligate the Company to indemnify the third
parties only if certain events occur or claims are made, as these contingent events or claims are
defined in each of these agreements. The Company believes that the resolution of any claims that
might arise in the future, either individually or in the aggregate, would not materially affect the
earnings or financial condition of the Company.
NOTE 14 RETIREMENT PLANS
The Company has two domestic defined benefit plans, the account balance defined benefit pension
plan (the ABP Plan) and the Crew defined benefit plan (the Crew Plan), together referred to as
the Plans, covering all eligible employees of the Company.
The Crew Plan discontinued employee participation and accruing additional employee benefits in
2001. In February 2006, the Company announced that it would freeze the ABP Plan as of December 31,
2006. Beginning January 1, 2007, no new participants will enter the ABP Plan, although participant
account balances will continue to receive interest credits of approximately 6% in 2007 on existing
account balances. Company benefits credited to ABP Plan participant accounts which were
historically made based on a percentage of participant salary and years of service will no longer
be made beginning January 1, 2007. Freezing of the ABP Plan was accounted for as a curtailment in
the first quarter of 2006 under SFAS No. 88, Employers Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and during the first
quarter 2006, the Company recorded a $0.1 million curtailment charge related to service cost
unrecognized prior to freezing the ABP Plan. In the fourth quarter of 2006, the Company decided to
terminate the Plans. The Company has requested termination determination letters on the Plans from
the IRS and approval of the termination by the Pension Benefit Guaranty Corporation. Once approved,
the Company intends to distribute individual account balances or purchase annuities to settle the
account balances. The Company makes contributions to the Plans in amounts sufficient, on an
actuarial basis, to fund at a minimum, the Plans normal cost on a current basis, and to fund the
actuarial liability for past service costs in accordance with Department of Treasury regulations.
The Company may make contributions of up to $10 million to its pension plans in 2007 unless
approval to terminate the Plans is received, in which case the Company may be required to make
contributions to the Plans of up to $25 million (including the $10 million previously described) in
order to make the required distributions to settle plan participant account balances. When the
Plans are terminated, the Company would expect to recognize pretax settlement charges of
approximately $33 million to $50 million.
Net periodic pension cost (credit) for the Plans for the quarters ended April 1, 2007 and April 2,
2006 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
(In thousands) |
|
April 1, 2007 |
|
|
April 2, 2006 |
|
Service cost |
|
$ |
0 |
|
|
$ |
1,550 |
|
Interest cost |
|
|
1,301 |
|
|
|
1,355 |
|
Expected return on plan assets |
|
|
(1,244 |
) |
|
|
(2,039 |
) |
Amortization of prior service cost |
|
|
0 |
|
|
|
(100 |
) |
Amortization of net loss |
|
|
713 |
|
|
|
940 |
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
770 |
|
|
$ |
1,706 |
|
|
|
|
|
|
|
|
13
NOTE 15 REVENUES
Revenues consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
(In thousands) |
|
April 1, 2007 |
|
April 2, 2006 |
|
Sales: |
|
|
|
|
|
|
|
|
Sales from company operated restaurants |
|
$ |
500,339 |
|
|
$ |
490,940 |
|
Product sales to franchisees |
|
|
22,605 |
|
|
|
22,495 |
|
|
|
|
|
522,944 |
|
|
|
513,435 |
|
|
Franchise revenues: |
|
|
|
|
|
|
|
|
Rents and royalties |
|
|
66,534 |
|
|
|
64,730 |
|
Franchise fees |
|
|
369 |
|
|
|
180 |
|
Net gains on sales of properties to franchisees |
|
|
317 |
|
|
|
333 |
|
|
|
|
|
67,220 |
|
|
|
65,243 |
|
|
Total revenues |
|
$ |
590,164 |
|
|
$ |
578,678 |
|
|
NOTE 16 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of SFAS No. 115. This statement allows entities to
measure certain assets and liabilities at fair value, with changes in the fair value recognized in
earnings. The statements objective is to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without applying complex hedge accounting
provisions. This statement is effective for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the impact of the adoption of SFAS No. 159.
14
WENDYS INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE OVERVIEW
Wendys International, Inc. and subsidiaries (the Company ) completed the spin-off of Tim Hortons
Inc. (THI ) on September 29, 2006 and the sale of Baja Fresh on November 28, 2006. During the
fourth quarter 2006, the Company also approved the prospective disposition of Cafe Express.
Accordingly, the after-tax operating results of THI, Baja Fresh and Cafe Express now appear in the
income from discontinued operations line on the income statement.
The Company reported net income of $14.7 million for first quarter 2007 compared to $51.2 million
for first quarter 2006. Income from continuing operations was $14.5 million for first quarter 2007
compared to a loss of $5.9 million in first quarter 2006. Reported operating income from continuing
operations improved $29.2 million in 2007, from a loss of $0.6 million to income of $28.6 million.
The improved operating income results from continuing operations were driven by higher company
operated restaurant margins, higher royalty revenues and lower general and administrative expenses.
Total company operated restaurant margins increased from 6.0% in the first quarter of 2006 to 8.6%
in the first quarter 2007 due to positive average same-store sales,
including the impact of the Companys new market-based pricing
approach, and lower costs. Royalties also
increased in 2007 due to positive average same-store sales at franchised restaurants. A reduction
of $4.5 million in general and administrative expenses in the first quarter 2007 versus 2006
reflected the impact of 2006 cost saving initiatives. Other significant items impacting the
operating income comparison between first quarter 2006 and the first quarter 2007 included $15.0
million in 2006 incremental contributions to the Wendys National Advertising Program ( WNAP )
that did not recur in 2007, partially offset by $3.6 million in higher asset gains in 2006, $3.0
million in higher store closing charges in 2007, higher performance-based bonus accruals of $3.2
million and higher stock compensation expense of $2.1 million.
Average same-store sales results for domestic Wendys as a percentage change for the first quarter
2007 versus prior year are listed in the table below and show average same-store sales improved in
the first quarter 2007. One of the key indicators in the restaurant industry that management
monitors to assess the health of the Company is average same-store sales. Franchisee operations
are not included in the Companys financial statements; however, franchisee sales result in
royalties and rental income, which are included in the Companys franchise revenues.
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
April 1, 2007 |
|
April 2, 2006 |
Wendys U.S. Company |
|
|
3.8 |
% |
|
|
(4.8 |
)% |
Wendys U.S. Franchise |
|
|
3.7 |
% |
|
|
(5.2 |
)% |
A summary of systemwide restaurants is included on page 22.
Company Operated Restaurant Margins
The Companys restaurant margins are computed as sales from company operated restaurants less cost
of sales from company operated restaurants and company restaurant operating costs, divided by sales
from company operated restaurants. Depreciation is not included in the calculation of company
operated restaurant margins. Company operated restaurant margins improved to 8.6% in first quarter
2007 compared to 6.0% in first quarter 2006, primarily reflecting improvements in cost of sales.
Sales
The Companys sales are comprised of sales from company operated restaurants, sales of kids meal
toys to franchisees and sales of sandwich buns from the Companys bun baking facilities to
franchisees. Franchisee sales are not included in reported sales. Of total sales, sales from U.S.
company operated restaurants comprised approximately 88% in each period presented, while the
remainder primarily represented sales from Canadian company operated restaurants.
The $9.5 million increase in sales in 2007 versus 2006 primarily included the impact of positive
average same-store sales at company operated restaurants, including
the impact of the Companys new market-based pricing approach, partially offset by 31, or 2.4%, fewer
average U.S. company operated restaurants open versus the prior year. Total company operated
restaurants open at April 1, 2007 were 1,455 versus 1,468 at April 2, 2006.
The following table summarizes various restaurant statistics for U.S. company operated restaurants
for the quarters ended April 1, 2007 and April 2, 2006, respectively:
15
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
April 1, 2007 |
|
April 2, 2006 |
Average same-store sales increase (decrease) |
|
|
3.8 |
% |
|
|
(4.8 |
)% |
Company operated restaurants open |
|
|
1,308 |
|
|
|
1,313 |
|
Franchise Revenues
The Companys franchise revenues include royalty income from franchisees, rental income from
properties leased to franchisees, gains from the sales of properties to franchisees and franchise
fees. Franchise fees cover charges for various costs and expenses related to establishing a
franchisees business.
The $2.0 million increase in franchise revenues in 2007 versus 2006 primarily included the impact
of positive average same-store sales at U.S. franchised restaurants, partially offset by 29, or
0.6%, fewer average U.S. franchisee stores open versus the prior year. Total franchise restaurants
open at April 1, 2007 were 5,203 versus 5,277 at April 2, 2006.
The following table summarizes various restaurant statistics for U.S. franchised restaurants for
the quarters ended April 1, 2007 and April 2, 2006, respectively:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
April 1, 2007 |
|
April 2, 2006 |
Average same-store sales increase (decrease) |
|
|
3.7 |
% |
|
|
(5.2 |
)% |
Franchise restaurants open |
|
|
4,641 |
|
|
|
4,704 |
|
Cost of Sales
Cost of sales includes food, paper and labor costs for company operated restaurants, and the cost
of goods sold to franchisees related to kids meal toys and from the Companys bun baking
facilities. Of the total cost of sales, U.S. company operated restaurant cost of sales comprised
approximately 88% in each period presented, while the remainder primarily represented Canadian
company operated restaurants. Overall, cost of sales as a percent of sales improved 220 basis
points in the first quarter 2007, from 64.2% in 2006 to 62.0% in 2007.
U.S. company operated restaurant cost of sales were 60.1% of U.S. company operated restaurant gross
sales in 2007, compared with 62.7% in 2006. U.S. food and paper costs were 32.2% of U.S. company
operated restaurant gross sales in 2007, compared with 34.0% in 2006. The improvement in 2007
versus 2006 primarily reflects the leverage impact from positive average same-store sales, lower
commodity costs, including an approximate 11% decline in beef, a favorable change in product mix
toward higher-margin products, and improved food cost management resulting in lower food waste.
U.S. labor costs were 27.9% of U.S. company operated restaurant gross sales in 2007, compared with
28.7% in 2006. The improvement in 2007 versus 2006 primarily reflects the leverage impact from
positive average same-store sales and labor cost-saving initiatives, partially offset by an average
wage increase of 1.9%.
Company Restaurant Operating Costs
Company restaurant operating costs include costs necessary to manage and operate company
restaurants, except cost of sales and depreciation. Of the total company restaurant operating
costs, U.S. company stores comprised approximately 90% in each period presented, while the
remainder primarily represented Canadian company stores. As a percent of sales, company restaurant
operating costs improved to 29.1% in first quarter 2007 from 29.2% in first quarter 2006. The
improvement from 2006 primarily reflects the leverage impact from positive average same-store
sales, as well as the impact from the 2006 cost savings initiatives. Prior to the spin-off of THI,
the Company consolidated its 50/50 Canadian restaurant real estate joint venture with THI. In
accordance with accounting principles generally accepted in the United States, at the time of the
THI spin-off the Company began accounting for this investment under the equity method of
accounting. This resulted in higher rent expense of
$1.3 million, or a 0.2% increase as a percent of sales, in 2007 company restaurant
operating costs that previously eliminated when the joint venture was consolidated.
Operating Costs
Operating costs include rent expense and other costs related to properties subleased to
franchisees, other franchisee related costs and costs related to operating and maintaining the
Companys bun baking facilities.
The $15.9 million decrease in operating costs in 2007 versus 2006 primarily reflects a $15.0
million special contribution to WNAP in 2006 that did not recur in 2007, as well as $1.8 million in
rent expense recorded in 2006 related to the Companys
16
50/50 Canadian restaurant real estate joint venture with THI. Subsequent to the spin-off of THI,
this 50/50 joint venture is no longer consolidated and is instead accounted for under the equity
method of accounting. As a result, rent expense incurred by the joint venture of $1.8 million is
no longer included in operating costs.
Depreciation of Property and Equipment
The $3.1 million reduction in consolidated depreciation of property and equipment in 2007 versus
2006 includes the absence of depreciation related to the 50/50 Canadian joint venture with THI
which was consolidated prior to the spin-off of THI.
General and Administrative Expenses
General and administrative expenses decreased $4.5 million, or 8.1%, to $50.8 million versus 2006.
As a percent of revenues, general and administrative expenses were lower in 2007 at 8.6% versus
9.6% in 2006. The dollar and percent decrease in 2007 primarily reflects lower salaries and
benefits of $6.3 million, lower consulting and professional fees of $2.9 million, and lower
insurance premiums of $1.1 million. These decreases were partially offset by incremental
expense in 2007 for performance-based incentive compensation of $3.2 million and incremental stock
compensation expense of $2.1 million.
Other (Income) Expense, Net
Other (income) expense, net includes amounts that are not directly related to the Companys primary
business. These include expenses related to store closures, restructuring costs, sales of
properties to non-franchisees, joint venture income and reserves for legal issues.
The following is a summary of other (income) expense, net for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
April 1, 2007 |
|
|
April 2, 2006 |
|
Restructuring costs |
|
$ |
1,031 |
|
|
$ |
0 |
|
Store closure costs |
|
|
3,821 |
|
|
|
775 |
|
Equity investment income |
|
|
(2,308 |
) |
|
|
(152 |
) |
Rent revenue |
|
|
0 |
|
|
|
(4,283 |
) |
Net gain from property dispositions |
|
|
(473 |
) |
|
|
(4,077 |
) |
Other, net |
|
|
278 |
|
|
|
1,135 |
|
|
|
|
|
|
|
|
Other (income) expense, net |
|
$ |
2,349 |
|
|
$ |
(6,602 |
) |
|
|
|
|
|
|
|
Restructuring costs
In 2006, the
Company accrued restructuring costs related to its voluntary enhanced retirement plan, reduction in
force and professional fees as part of a cost reduction plan. In addition to the restructuring
liabilities accrued in 2006, in the first quarter of 2007 the Company accrued an additional $1.0
million of expense related to severance and professional fees.
Store closure costs
The Company recorded store closure charges of $3.8 million and $0.8 million, in first quarter 2007
and 2006, respectively, including asset impairments and lease termination costs.
Equity investment income
Equity investment income in 2007 includes equity income recorded from the Companys 50/50 Canadian
restaurant real estate joint venture with THI. Prior to the spin-off of THI on September 29, 2006,
this joint venture was consolidated.
Rent revenue
Rent revenue in 2006 represents rent paid by THI to the 50/50 Canadian restaurant real estate joint
venture between the Company and THI. After the spin-off of THI in September 2006, this joint
venture is no longer consolidated in the Companys financial statements and only the Companys 50%
share of the joint venture income is included in other (income) expense, net, under the equity
method of accounting.
17
Net gain from property dispositions
The $4.1 million net gain from property dispositions in the first quarter 2006 primarily reflects
the Companys sale in first quarter 2006 of properties previously leased to franchisees.
Interest Expense
The $3.2 million increase in interest expense in 2007 versus 2006 primarily reflects interest on
debt that was established in the fourth quarter 2006 through the sale of a portion of the Companys
2007 royalty stream. For further information on this transaction, see the Liquidity and Capital
Resources section below.
Interest Income
The $3.4 million increase in interest income in 2007 versus 2006 primarily reflects higher average
2007 cash balances and a higher rate of interest earnings on those balances.
Income Taxes
The effective income tax rate from continuing operations for the quarter ended April 1, 2007 was
33.5%, compared to 22.2% for the comparative period ended April 2, 2006. Income tax expense for
both periods was impacted by several discrete items that reduced the effective rate.
Income from Discontinued Operations
The Company completed its spin-off of THI on September 29, 2006 and completed its sale of Baja
Fresh on November 28, 2006. During the fourth quarter 2006, the Company also approved the
prospective sale of Cafe Express. Accordingly, the after-tax operating results of THI, Baja Fresh
and Cafe Express now appear in the income from discontinued operations line on the income
statement. Income from discontinued operations, net of tax, was $0.2 million and $57.1 million for
first quarter 2007 and 2006, respectively. The results from discontinued operations for first
quarter 2007 only include Cafe Express, while first quarter 2006 includes THI, Baja Fresh and Cafe
Express. THI net income included in the first quarter 2006 income from
discontinued operations was $61.0 million. See also Note 6 to the Consolidated Condensed Financial Statements.
COMPREHENSIVE INCOME
Comprehensive income was higher than net income by $1.8 million for the first quarter of 2007 and
by $0.7 million for the first quarter 2006. The increase in comprehensive income in 2007 was
comprised of $1.0 million in favorable Canadian foreign translation adjustments and $0.8 million
related to the Companys pension liability. The increase in 2006 was comprised of $0.7 million in
activity related to the Companys cash flow hedges. Offsetting the first quarter 2006 weakening in
the Canadian dollar was a $2.3 million gain, net of taxes of $1.3 million, related to the Companys
hedge of certain net investment positions. This gain was included in the first quarter 2006
translation adjustments component of other comprehensive income. At the end of the first quarter
2007, the Canadian exchange rate was $1.15 versus $1.17 at December 31, 2006. At the end of the
first quarter 2006, the Canadian exchange rate was $1.17 versus $1.16 at January 1, 2006.
FINANCIAL POSITION
Overview
The Company generates considerable cash flow each year from operating income excluding depreciation
and amortization. The sale of properties has also provided significant cash to continuing
operations over the last three years. The main recurring requirement for cash is capital
expenditures. The Company generally generates cash from continuing operating activities in excess
of capital expenditure spending.
Share repurchases are part of the ongoing financial strategy utilized by the Company, and normally
these repurchases come from cash on hand and the cash provided by option exercises. In the first
quarter of 2007, the Company also used a portion of the funds received from THI after its initial
public offering (IPO) to repurchase 9.0 million shares for $282.5 million. In the short term,
the Company expects cash provided by option exercises to decrease as the Company has not granted
stock options over the last two years and only approximately 1.6 million options are outstanding as
of April 1, 2007. The Company plans to grant stock options in the second quarter of 2007 under the
2007 Stock Incentive Plan (the 2007 Plan) that was approved at its shareholders meeting on April
26, 2007.
During the first quarter, the Companys Board of Directors approved a $0.085 quarterly dividend
paid to shareholders on February 27, 2007. In February 2007, the Company announced its intention to
increase its annual cash dividend from $0.34 per
18
share to $0.50 per share beginning with the quarterly dividend to be paid in May 2007. In April
2007, the Companys Board of Directors approved a $0.125 quarterly dividend to be paid to
shareholders on May 21, 2007. The Company currently has a $500 million shelf registration and $200
million line of credit, both of which are unused as of April 1, 2007.
The Company maintains a strong balance sheet. Standard & Poors and Moodys rate the Companys
senior unsecured debt BB+ and Ba2, respectively.
Comparative Cash Flows
Cash flows
from operations provided by continuing operations were $55.1 million compared to cash
used of $15.9 million for the prior year. The 2007 increase was primarily due to higher income from
continuing operations in 2007 versus 2006, a $10.6 million tax refund in the first quarter of 2007
versus tax payments in the first quarter of 2006, and increases in working capital related to the
timing of receipts and disbursements.
Net cash used in investing activities from continuing operations totaled $19.5 million in the first
quarter of 2007 compared to $5.0 million in 2006. The $14.5 million increase in net cash used in
2007 reflects a decrease in proceeds from property dispositions of $32.5 million due to the
disposition of nine company operated Wendys restaurants and the sale of other properties to third
parties and franchisees in the first quarter of 2007 compared to the sale of 37 company operated
Wendys restaurants and other properties to third parties and franchisees in the first quarter of
2006. Partially offsetting the decrease in property disposition proceeds was a $17.2 million
decrease in capital expenditures in 2007 due to lower Wendys store development.
Financing activities from continuing operations used cash of $295.7 million in the first quarter of
2007 compared to $180.6 million in 2006. The $115.1 million increase in 2007 outflows includes a
$62.5 million increase relating to the repurchase of 9.0 million shares of the Companys common
stock in 2007 compared to 3.8 million shares in 2006, a decrease of $46.2 million related to a
lower number of 2007 employee stock option exercises compared to 2006, $10.4 million less in 2007
stock-based compensation tax benefits due to the lower number of 2007 employee stock option
exercises and $7.7 million in additional 2007 net debt payments. These 2007 net higher outflows
were partially offset by lower 2007 dividend payments of $11.6 million. The Company adjusted its
annual dividend rate subsequent to the spin-off of THI to reflect the reduced earnings of the
Company excluding THI.
Discontinued operations cash flows for operating, investing and financing activities included THI,
Baja Fresh and Cafe Express for 2006, while for 2007, discontinued operations cash flows include
only Cafe Express. Cash provided by financing activities from discontinued operations of $1.2
billion in the first quarter of 2006 included proceeds of $722.3 million related to the THI IPO and
THI proceeds from the issuance of debt, net of issuance costs, of $438.6 million.
Liquidity and Capital Resources
Cash flow from operations, cash and investments on hand, possible asset sales, cash available
through existing revolving credit agreements and the possible issuance of securities should provide
for the Companys projected short-term and long-term cash requirements, including cash for capital
expenditures, authorized share repurchases, dividends, repayment of debt, future acquisitions of
restaurants from franchisees and other corporate purposes.
In the first quarter of 2007, the Company completed an accelerated share repurchase (ASR) of 9.0
million shares for $282.5 million at an initial price of $31.33 plus certain other costs. The
repurchased shares in the ASR are subject to a future contingent-purchase price adjustment expected
to be settled in the second or third quarter of 2007. Since 1998 through April 1, 2007, the Company
has repurchased 77.6 million common and other shares exchangeable into common shares for $2.4
billion.
In the fourth quarter of 2006, the Company entered into an agreement to sell approximately 40% of
the Companys U.S. royalty stream for a 14-month period to a third party in return for a cash
payment in 2006 of $94.0 million. Royalties subject to the agreement relate to royalties payable to
a subsidiary of the Company for both company operated and franchised stores. The cash received in
2006 is classified as debt and as of April 1, 2007, the recorded debt is $87.9 million. This
recorded debt amount is expected to be repaid through May 2008 as royalties are received. The
agreement related to this transaction will conclude in May 2008.
In February 2007, the Company announced that based on its strong cash position and strategic
direction, it intended to increase its annual common stock dividend
by 47%, from the $0.34 rate established in the fourth quarter of 2006 to $0.50,
beginning with the May 2007 payment. The $0.50 annual dividend
was established with an intended dividend yield of 1.4% to 1.6%.
Prior to the spin-off of THI in the third quarter of 2006, the
Companys annual dividend rate was $0.68.
In 2006 and 2005, the Company issued only restricted stock shares, restricted stock units and
performance shares (together restricted shares) under its existing equity plans. The issuance of
restricted shares combined with significant option exercises over the last two years have reduced
overhang (all approved but unexercised options and shares divided by shares outstanding plus all
approved but unexercised options and shares). The Company obtained shareholder approval for the
2007 Plan at its
19
shareholders meeting on April 26, 2007. The 2007 Plan provides for equity compensation awards in
the form of stock options, restricted stock, restricted stock units, stock appreciation rights,
dividend equivalent rights, performance shares, performance units and share awards (collectively,
Awards) to eligible employees and directors of the Company or its subsidiaries. The Company
intends to use the 2007 Plan to issue annual stock option grants and long-term performance unit
awards beginning in 2007. The 2007 Plan authorizes up to six million common shares for grants of
Awards. The common shares offered under the 2007 Plan may be authorized but unissued shares,
treasury shares or any combination thereof. The Company expects that approximately 50% of the
value of equity awards made in 2007 and subsequent years will be comprised of stock options, with
the remaining 50% of the value comprised of performance awards.
In 2003, the Company filed a shelf registration statement on Form S-3 with the SEC to issue up to
$500 million of securities. As of April 1, 2007, the Company was in compliance with its covenants
under its $200 million revolving credit facility and the limits of its Senior Notes and debentures.
As of April 1, 2007, no amounts under the $200 million credit facility were drawn and all of the
$500 million of securities available under the above-mentioned Form S-3 filing remained unused.
Standard & Poors and Moodys rate the Companys senior unsecured debt as BB+ and Ba2,
respectively. The ratings were reduced in 2006 and are considered
below investment grade. Following the Companys announcement on April 25, 2007 that its Board of Directors had formed a
special committee to investigate all strategic options for the Company (see Formation of Special
Committee below), Standard & Poors issued a statement that it had placed the Companys debt
ratings on credit watch with negative implications and Moodys issued a statement that it had
placed the Companys debt ratings on review for possible downgrade. As a
result of the lower debt ratings, the Company could incur an increase in borrowing costs if it were to enter into new
borrowing arrangements and can no longer access the capital markets through its commercial paper
program. If the ratings should continue to decline, it is possible that the Company would not be
able to borrow on acceptable terms. Factors that could be significant to the determination of the
Companys credit ratings include, among other things, sales and cost trends, the Companys cash
position, cash flow, capital expenditures and stability of earnings. The Company does not have
significant term-debt maturities until 2011. The Company believes it will be able to pay or
refinance its debt obligations as they become due based on its strong financial condition and
sources of cash described above.
The Company expects that approximately $1.4 million of its unrecognized tax benefits will be
settled within one year and that approximately $22.1 million of its unrecognized tax benefits will
be settled in periods later than one year from April 1, 2007.
In the
first quarter of 2007, two put options were exercised by landlords. As
a result, in the second quarter of 2007 the Company will purchase 18
buildings for $12.4 million.
MANAGEMENTS OUTLOOK
New Comprehensive Plan to Focus on the Wendys Brand
In October 2006, the Company announced a new plan to drive restaurant-level economic performance
focused on product innovation, targeted marketing and operations excellence. Components include:
|
|
|
Revitalize Wendys Core BrandThe Company will re-focus on its brand essence,
Quality Made Fresh, centered on Wendys core strength, its hamburger business. |
|
|
|
|
Streamline and improve operationsIncludes a new restaurant services group to improve
system-wide restaurant operations standards, while emphasizing improved store profits and
operating margins. |
|
|
|
|
Reclaim Innovation LeadershipDevelopment of new products that reinforce Wendys
Quality Made Fresh brand essence and drive new consumers to its restaurants. The Company
believes its new product pipeline is now robust. |
|
|
|
|
Investing approximately $60 million per year over the next five years into the
upgrade and renovation of its company-operated restaurants. |
|
|
|
|
Strengthen Franchisee CommitmentProviding up to $25 million per year of incentives
to franchisees for reinvestments in their restaurants over the next five years, and
require franchisees to meet store remodel standards. |
|
|
|
|
Selling up to 50 in 2007 and targeting to sell up to 300 to 400 of its company
operated restaurants to franchisees beginning in 2008, while improving store level
profitability first. |
|
|
|
|
Capture New OpportunitiesSeeking to drive growth beyond its existing business. The
Company is expanding breakfast and is following a disciplined process for product
development and operations, as well as analyzing consumer feedback. With the QSR breakfast
market estimated at $30 billion, breakfast is a high priority for the Company that could
generate significant sales and profits. Also, the Company believes it has considerable
opportunity to expand in the U.S. over the long-term and is making infrastructure
investments to grow its international business. The Company will continue to moderate its
short-term North American development until restaurant revenues and operating cash flows
improve. |
|
|
|
|
Embrace a Performance-Driven CultureA redesign of its incentive compensation plan to
drive future performance to better reward individual employee performance and to better
align compensation with business performance in the short and longer term. |
|
|
|
|
Maintaining its strong corporate culture based on the values established by Wendys
founder Dave Thomas. |
Authorization of up to 35.4 million shares for repurchase
In October 2006, the Companys Board of Directors approved a share repurchase program of up to 35.4
million shares to be implemented over the next 18 to 24 months. The Company utilized the majority
of this authorization by conducting a modified Dutch Auction tender offer under which in the
fourth quarter of 2006 it purchased 22.4 million common shares at a purchase
20
price of $35.75. The Company purchased the shares tendered in the offer using existing cash on its
balance sheet. In the first quarter of 2007, the Company purchased 9.0 million common shares in an
ASR transaction at an initial price of $31.33 per share plus certain other costs. As a result, as
of April 1, 2007, 4.0 million shares remained under the Board of Directors share repurchase
authorization.
2007 Guidance
In April 2007, the Company reaffirmed its 2007 guidance of $330 to $340 million in continuing
income before interest, taxes, depreciation and amortization (EBITDA) based on operating income of
$215 million to $225 million and depreciation and amortization of $115 million. EBITDA is used by
management as a performance measure for benchmarking against its peers and competitors. The Company
believes EBITDA is a useful measure because it is frequently used by securities analysts, investors
and other interested parties to evaluate companies in the restaurant industry. The Companys 2007
projected earnings per share from continuing operations of $1.26 to $1.32 reflects the impact of
the 9.0 million shares repurchased in the first quarter of 2007.
Ongoing Initiatives
The Company continues to implement its strategic initiatives. These initiatives include leveraging
the Companys core assets, growing average same-store sales, improving store-level productivity to
enhance margins, improving operations, developing profitable new restaurants and implementing new
technology initiatives. Management intends to allocate resources to improve returns on assets and
invested capital, and monitors its progress by tracking various metrics, including return on
average assets, return on average equity and return on invested capital, as well as comparing to
historical performance, the Companys peers and other leading companies.
The Company also continues to focus on its dividend policy, continued share repurchases, an equity-based compensation program for employees and directors and stock ownership guidelines for Company officers. The stock ownership guidelines were revised by the Compensation Committee in April, 2007 and call for officers to hold Company stock, in-the-money vested stock options and other vested equity awards in the following amounts:
|
|
|
Position |
|
Multiple
of Annual Base Salary |
Chief Executive Officer |
|
5X |
Chief Operations Officer and Executive Vice Presidents |
|
3X |
Other Officers |
|
1X |
The Company intends to remain focused on established long-term operational strategies of exceeding
customer expectations, fostering a performance-driven culture, delivering a balanced message of
brand equity plus value in marketing, and growing a healthy restaurant system. The Company believes
its success depends on providing everyday value, quality and variety, not price discounting. As a
result, the Company provides a variety of menu choices and will continue to evaluate and introduce
new products to meet the trends and desires of its customers. Management believes in reinvesting in
its restaurants to maintain a fresh image, providing convenience for its customers and increasing
the overall efficiency of restaurant operations. The goal of these strategies is to increase
average sales over time, primarily through greater customer traffic in the restaurants. The Company
intends to effectively manage corporate and field-level costs to control overall general and
administrative expense.
New restaurant development will continue to be an important opportunity for the Company. Wendys is
under penetrated in key markets. The Company intends to grow responsibly, focusing on the markets
with the best potential for sales and return on investment. A total of 122 new restaurants were
opened in 2006. Current plans call for a total of 80 to 110 new company and franchise restaurant
units to open in 2007. The primary focus will be on core operations of Wendys in North America,
with the majority of units being standard sites.
Another element of the Companys strategic plan is the evaluation of potential acquisitions of
franchised restaurants, the sale of company stores to franchisees and vertical integration
opportunities that could add to the Companys long-term earnings growth.
Formation of Special Committee
In April 2007, the Company announced that its Board of Directors, acting unanimously, had formed a
special committee of independent directors to investigate all strategic options for Wendys. These
options, among other things, may include revisions to the Companys strategic plan, changes to its
capital structure, or a possible sale, merger or other business combination. There is no specific
timeframe to complete the review and there is no assurance that the process will result in any
changes to the Companys current plans. Certain alternatives could affect the Companys 2007
guidance.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements as of April 1, 2007 and December 31, 2006 as
that term is described by the SEC.
21
MARKET RISK
The Companys exposure to various market risks remains substantially the same as reported as of
December 31, 2006. The Companys disclosures about market risk are incorporated herein by reference
from pages 36 through 38 of the Companys 2006 Annual Report on Form 10-K filed with the SEC on
March 1, 2007.
WENDYS INTERNATIONAL, INC. AND SUBSIDIARIES
SYSTEMWIDE RESTAURANTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
|
|
|
|
Increase/ |
|
|
|
|
|
|
|
|
|
|
|
(Decrease) |
|
|
|
|
|
|
(Decrease) |
|
|
|
As of |
|
|
As of |
|
|
From Prior |
|
|
As of |
|
|
From Prior |
|
|
|
April 1, 2007 |
|
|
April 2, 2006 |
|
|
Quarter |
|
|
December 31, 2006 |
|
|
Year |
|
Wendys |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
1,308 |
|
|
|
1,313 |
|
|
|
(5 |
) |
|
|
1,317 |
|
|
|
(9 |
) |
Franchise |
|
|
4,641 |
|
|
|
4,704 |
|
|
|
(63 |
) |
|
|
4,638 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,949 |
|
|
|
6,017 |
|
|
|
(68 |
) |
|
|
5,955 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
145 |
|
|
|
150 |
|
|
|
(5 |
) |
|
|
146 |
|
|
|
(1 |
) |
Franchise |
|
|
231 |
|
|
|
230 |
|
|
|
1 |
|
|
|
231 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
376 |
|
|
|
380 |
|
|
|
(4 |
) |
|
|
377 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
2 |
|
|
|
5 |
|
|
|
(3 |
) |
|
|
2 |
|
|
|
0 |
|
Franchise |
|
|
331 |
|
|
|
343 |
|
|
|
(12 |
) |
|
|
339 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
333 |
|
|
|
348 |
|
|
|
(15 |
) |
|
|
341 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Wendys |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
1,455 |
|
|
|
1,468 |
|
|
|
(13 |
) |
|
|
1,465 |
|
|
|
(10 |
) |
Franchise |
|
|
5,203 |
|
|
|
5,277 |
|
|
|
(74 |
) |
|
|
5,208 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,658 |
|
|
|
6,745 |
|
|
|
(87 |
) |
|
|
6,673 |
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 159 The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of SFAS No. 115. This statement allows entities to measure
certain assets and liabilities at fair value, with changes in the fair value recognized in
earnings. The statements objective is to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without applying complex hedge accounting
provisions. This statement is effective for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the impact of the adoption of SFAS No. 159.
SAFE HARBOR STATEMENT
Certain information contained in this Form 10-Q, particularly information regarding future economic
performance and finances, plans and objectives of management, is forward looking. In some cases,
information regarding certain important factors that could cause actual results to differ
materially from any such forward-looking statement appears together with such statement. In
addition, the following factors, in addition to other possible factors not listed, could affect the
Companys actual results and cause such results to differ materially from those expressed in
forward-looking statements. These factors include: competition within the quick-service restaurant
industry, which remains extremely intense, both domestically and internationally, with many
competitors pursuing heavy price discounting; changes in economic conditions; changes in consumer
perceptions of food safety; harsh weather, particularly in the first and fourth quarters; changes
in consumer tastes; labor and benefit costs; legal claims; risk inherent to international
development (including currency fluctuations); the continued ability of the Company and its
franchisees to obtain suitable locations and financing for new restaurant development; governmental
initiatives such as minimum wage
rates, taxes and possible franchise legislation; changes in applicable accounting rules; the
ability of the Company to successfully complete transactions designed to improve its return on
investment; or other factors set forth in Exhibit 99 attached hereto.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information is incorporated by reference from the section titled Market Risk on page 22 of
this Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
(a) |
|
The Company, under the supervision, and with the participation, of its management, including
its Chief Executive Officer and Chief Financial Officer, performed an evaluation of the
Companys disclosure controls and procedures, as contemplated by Securities Exchange Act Rule
13a-15. Based on that evaluation, the Companys Chief Executive Officer and Chief Financial
Officer concluded, as of the end of the period covered by this report, that such disclosure
controls and procedures were effective. |
(b) |
|
No change was made in the Companys internal control over financial reporting during the
Companys most recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting. |
23
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 26, 2006, a minority of noteholders filed a lawsuit in New York seeking to enjoin the
spin-off of THI. Following a hearing on September 28, 2006, the U.S. District Court in New York
City denied in all respects the plaintiff noteholders motion for a temporary restraining order and
a preliminary injunction. On October 10, 2006, the noteholders voluntarily dismissed their lawsuit
and some (but not all) of the same noteholders that had filed the lawsuit issued a purported notice
of default asserting that the spin-off of THI on September 29, 2006 violated the terms of one of
the indentures governing the Companys public debt. On October 11, 2006, the Company filed a
declaratory judgment in the U.S. District Court in New York City seeking a ruling from the Court
that no violation of the indenture has occurred.
In
February 2007, the Company reached a settlement with the
noteholders pursuant to which the notice of default has
been withdrawn and the case has been dismissed. The settlement was not material to the financial
condition or earnings of the Company.
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors disclosed in Part I, Item 1A. Risk
Factors in the Companys Annual Report on Form 10-K for the year ended December 31, 2006. In addition to
the other information set forth in this report, you should carefully consider the factors discussed
in the Companys Annual Report on Form 10-K, which could materially affect the Companys business,
financial condition or future results. The risks described in the Companys Annual Report on Form
10-K are not the only risks facing the Company. Additional risks and uncertainties not currently
known to the Company or that it currently deems to be immaterial also may materially adversely
affect its business, financial condition and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table presents the Companys repurchases of its common stock for each of the three
periods included in the first quarter ended April 1, 2007:
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) Maximum Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(or Approximate |
|
|
|
|
|
|
|
|
|
|
(c) Total Number |
|
Dollar Value) of |
|
|
|
|
|
|
|
|
|
|
of Shares Purchased |
|
Shares that May Yet |
|
|
|
|
|
|
|
|
|
|
as Part of Publicly |
|
be Purchased Under |
|
|
(a) Total Number |
|
(b) Average Price |
|
Announced Plans or |
|
the Plans |
Period |
|
of Shares Purchased |
|
Paid Per Share |
|
Programs |
|
or Programs (1) |
|
Period 1 (January 1, 2007
February 4, 2007) |
|
|
0 |
|
|
$ |
0 |
|
|
|
0 |
|
|
|
12,986,722 |
|
Period 2 (February 5, 2007
March 4, 2007) |
|
|
0 |
|
|
$ |
0 |
|
|
|
0 |
|
|
|
12,986,722 |
|
Period 3 (March 5, 2007
April 1, 2007) |
|
|
9,000,000 |
|
|
$ |
31.33 |
|
|
|
9,000,000 |
|
|
|
3,986,722 |
|
|
Total |
|
|
9,000,000 |
|
|
$ |
31.33 |
|
|
|
9,000,000 |
|
|
|
3,986,722 |
|
|
|
|
|
(1) |
|
On October 9, 2006 the Companys Board of Directors authorized the repurchase of
up to 35.4 million common shares of the Company to be implemented over 18-24 months from the
date of authorization. This authorization replaced all prior authorizations, including the
$907.3 million authorization remaining at October 1, 2006. The nine million shares repurchased
in the quarter were repurchased pursuant to an ASR transaction as further described in Part I
of this Form 10-Q. |
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of the Companys shareholders was held April 26, 2007.
(b) The following table sets forth the name of each director elected at the meeting and the number
of votes for or withheld from each director:
|
|
|
|
|
|
|
|
|
Director |
|
For |
|
Withheld |
Janet Hill |
|
|
79,063,466 |
|
|
|
7,777,599 |
|
John R. Thompson |
|
|
80,951,694 |
|
|
|
5,889,371 |
|
J. Randolph Lewis |
|
|
80,155,335 |
|
|
|
6,685,730 |
|
Stuart I. Oran |
|
|
84,913,590 |
|
|
|
1,927,475 |
|
24
The following directors did not stand for reelection at the meeting (the year in which each
directors term expires is indicated in parenthesis): Kerrii B. Anderson (2008), William E. Kirwan
(2008), Ann B. Crane (2008), Jerry W. Levin (2008), James V. Pickett (2009), Thomas F. Keller
(2009), David P. Lauer (2009), James F. Millar (2009) and Peter H. Rothschild (2009).
(c) The following table sets forth the brief description of the other matters voted on at the
Annual Meeting and the number of votes cast for, against or abstaining from, as well as broker
nonvotes on, the matter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broker |
|
|
For |
|
Against |
|
Abstain |
|
Nonvotes |
Ratification of PricewaterhouseCoopers LLP as
the Companys independent registered public
accounting firm for 2007 |
|
|
84,834,838 |
|
|
|
1,406,807 |
|
|
|
599,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approval of the Companys new Senior Executive
Annual Performance Plan |
|
|
78,874,788 |
|
|
|
7,172,874 |
|
|
|
793,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approval of the Companys 2007 Stock Incentive Plan |
|
|
66,294,928 |
|
|
|
5,188,460 |
|
|
|
756,679 |
|
|
|
14,600,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of a shareholder proposal regarding a
policy to identify and label all food products
containing genetically-engineered ingredients or
products of animal cloning |
|
|
8,406,755 |
|
|
|
57,436,398 |
|
|
|
6,396,906 |
|
|
|
14,601,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of a shareholder proposal to have the
Company issue a report regarding its policies and
practices related to long-term social and
environmental sustainability |
|
|
21,865,837 |
|
|
|
44,176,013 |
|
|
|
6,198,214 |
|
|
|
14,601,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of a shareholder proposal regarding a
report on the feasibility of controlled-atmosphere
killing of chickens by suppliers |
|
|
9,212,604 |
|
|
|
55,438,129 |
|
|
|
7,589,338 |
|
|
|
14,600,994 |
|
ITEM 6. EXHIBITS
(a) Index to Exhibits on Page 27.
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
WENDYS INTERNATIONAL, INC.
(Registrant)
|
|
Date: May 10, 2007 |
/s/ Kerrii B. Anderson
|
|
|
Kerrii B. Anderson |
|
|
Chief Executive Officer and President |
|
|
|
|
|
Date: May 10, 2007 |
/s/ Joseph J. Fitzsimmons
|
|
|
Joseph J. Fitzsimmons |
|
|
Executive Vice President and Chief Financial Officer |
|
|
|
|
|
Date: May 10, 2007 |
/s/
Brendan P. Foley, Jr.
|
|
|
Brendan P. Foley, Jr. |
|
|
Senior Vice President,
General Controller and Assistant Secretary |
|
26
WENDYS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
|
|
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Page No. |
|
10 |
|
|
Sample Change in Control Agreement |
|
|
28-43 |
|
|
|
|
|
|
|
|
|
|
|
31 |
(a) |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
31 |
(b) |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
32 |
(a) |
|
Section 1350 Certification of Chief Executive Officer |
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
32 |
(b) |
|
Section 1350 Certification of Chief Financial Officer |
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
99 |
|
|
Safe Harbor Under the Private Securities Litigation Reform Act of 1995 |
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48-49 |
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The Company and its subsidiaries are parties to instruments with respect to long-term debt for
which securities authorized under each such instrument do not exceed ten percent of the total
assets of the Company and its subsidiaries on a consolidated basis. Copies of these instruments
will be furnished to the Commission upon request.
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