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FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 2002
-------------
OR
/ / 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
------
WENDY'S INTERNATIONAL, INC.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
OHIO 31-0785108
- -------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 256, 4288 West Dublin-Granville Road, Dublin, Ohio 43017-0256
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(Registrant's 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 X NO .
---- ----
Indicate the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 4, 2002
- ------------------------------------ -----------------------------
Common shares, $.10 stated value 115,663,000 shares
Exhibit index on page 24.
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PAGES
PART I: Financial Information
Item 1. Financial Statements:
Consolidated Condensed Statements of Income for the quarters 3 - 4
and year-to-date periods ended June 30, 2002 and July 1, 2001
Consolidated Condensed Balance Sheets as of June 30, 2002
and December 30, 2001 5 - 6
Consolidated Condensed Statements of Cash Flows for the
year-to-date periods ended June 30, 2002 and July 1, 2001 7
Notes to the Consolidated Condensed Financial Statements 8 - 13
Item 2. Management's Discussion and Analysis of 14 - 21
Financial Condition and Results of Operations
PART II: Other Information
Item 4. Submission of Matters to Vote of Security Holders 21 - 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
Index to Exhibits 24
Exhibit 99(a) 25 - 26
Exhibit 99(b) 27
Exhibit 99(c) 28
2
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
QUARTER ENDED QUARTER ENDED
JUNE 30, 2002 JULY 1, 2001
--------- ---------
REVENUES
Retail sales $ 548,834 $ 491,464
Franchise revenues 135,213 118,146
--------- ---------
684,047 609,610
--------- ---------
COSTS AND EXPENSES
Cost of sales 342,427 311,063
Company restaurant operating
costs 113,471 102,401
Operating costs 26,760 20,821
General and administrative
expenses 58,832 53,329
Depreciation and amortization
of property and equipment 35,177 29,372
Other income (39) (794)
Interest expense 8,113 7,020
Interest income (1,445) (2,514)
--------- ---------
583,296 520,698
--------- ---------
INCOME BEFORE INCOME TAXES 100,751 88,912
INCOME TAXES 37,026 32,898
--------- ---------
NET INCOME $ 63,725 $ 56,014
========= =========
BASIC EARNINGS PER COMMON SHARE $ .58 $ .49
========= =========
DILUTED EARNINGS PER COMMON SHARE $ .54 $ .47
========= =========
DIVIDENDS PER COMMON SHARE $ .06 $ .06
========= =========
BASIC SHARES 110,551 113,849
========= =========
DILUTED SHARES 117,155 122,590
========= =========
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
3
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
YEAR-TO-DATE ENDED YEAR-TO-DATE ENDED
JUNE 30, 2002 JULY 1, 2001
----------- -----------
REVENUES
Retail sales $ 1,041,921 $ 941,067
Franchise revenues 254,522 224,081
----------- -----------
1,296,443 1,165,148
----------- -----------
COSTS AND EXPENSES
Cost of sales 656,703 599,565
Company restaurant operating
costs 220,098 200,810
Operating costs 51,916 41,850
General and administrative
expenses 115,082 107,090
Depreciation and amortization
of property and equipment 67,919 58,078
Other income (641) (1,325)
Interest expense 18,786 14,359
Interest income (2,851) (5,617)
----------- -----------
1,127,012 1,014,810
----------- -----------
INCOME BEFORE INCOME TAXES 169,431 150,338
INCOME TAXES 62,266 55,625
----------- -----------
NET INCOME $ 107,165 $ 94,713
=========== ===========
BASIC EARNINGS PER COMMON SHARE $ .99 $ .83
=========== ===========
DILUTED EARNINGS PER COMMON SHARE $ .93 $ .80
=========== ===========
DIVIDENDS PER COMMON SHARE $ .12 $ .12
=========== ===========
BASIC SHARES 108,345 114,095
=========== ===========
DILUTED SHARES 116,282 122,853
=========== ===========
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
4
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
JUNE 30, 2002 DECEMBER 30, 2001
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 139,547 $ 111,121
Accounts receivable, net 91,579 83,603
Notes receivable, net 7,546 11,295
Deferred income taxes 9,941 15,000
Inventories and other 56,736 45,334
----------- -----------
305,349 266,353
----------- -----------
PROPERTY AND EQUIPMENT 2,459,171 2,290,708
Accumulated depreciation and
amortization (712,368) (650,730)
----------- -----------
1,746,803 1,639,978
----------- -----------
NOTES RECEIVABLE, NET 27,877 32,694
GOODWILL, NET 299,601 41,214
DEFERRED INCOME TAXES 28,021 36,175
OTHER ASSETS 77,963 59,629
----------- -----------
$ 2,485,614 $ 2,076,043
=========== ===========
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
5
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
JUNE 30, 2002 DECEMBER 30, 2001
----------- -----------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 94,023 $ 112,245
Accrued expenses:
Salaries and wages 32,275 34,014
Taxes 74,664 59,113
Insurance 44,049 40,719
Other 48,819 46,386
Current portion of long-term
obligations 4,313 4,210
----------- -----------
298,143 296,687
----------- -----------
LONG-TERM OBLIGATIONS
Term debt 625,763 401,511
Capital leases 52,692 49,735
----------- -----------
678,455 451,246
----------- -----------
DEFERRED INCOME TAXES 70,972 82,287
OTHER LONG-TERM LIABILITIES 24,521 16,044
COMMITMENTS AND CONTINGENCIES
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY WENDY'S
FINANCING I, HOLDING SOLELY WENDY'S
CONVERTIBLE DEBENTURES 0 200,000
SHAREHOLDERS' EQUITY
Preferred stock, Authorized: 250,000 shares
Common stock, $.10 stated value per share,
Authorized: 200,000,000 shares,
Issued and Exchangeable:
148,868,000 and 138,452,000 shares,
respectively 14,313 13,271
Capital in excess of stated value 736,308 467,687
Retained earnings 1,471,789 1,377,840
Accumulated other comprehensive expense (28,622) (48,754)
----------- -----------
2,193,788 1,810,044
Treasury stock at cost: 33,277,000 and
33,277,000 shares, respectively (780,265) (780,265)
----------- -----------
1,413,523 1,029,779
----------- -----------
$ 2,485,614 $ 2,076,043
=========== ===========
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
6
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
YEAR-TO-DATE YEAR-TO-DATE
ENDED ENDED
JUNE 30, 2002 JULY 1, 2001
--------- ---------
NET CASH PROVIDED BY OPERATING $ 198,124 $ 137,382
ACTIVITIES --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from property dispositions 7,407 21,116
Capital expenditures (146,997) (133,123)
Acquisition of Baja Fresh (287,542) --
Acquisition of franchises (746) --
Principal payments on notes receivable 11,039 2,531
Investments in joint venture and other (22,054) --
Other investing activities (1,266) (7,391)
--------- ---------
Net cash used in investing activities (440,159) (116,867)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior
notes, net of issuance costs 224,345 --
Proceeds from employee stock
options exercised 61,506 14,501
Repurchase of common stock -- (25,315)
Principal payments on long-term
obligations (2,174) (1,852)
Dividends paid on common and
exchangeable shares (13,216) (13,687)
--------- ---------
Net cash provided by (used in) financing
activities 270,461 (26,353)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 28,426 (5,838)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 111,121 169,718
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 139,547 $ 163,880
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $ 18,604 $ 14,485
Income taxes paid 37,887 41,455
Capital lease obligations incurred 3,173 3,310
NON-CASH INVESTING AND FINANCING ACTIVITIES:
$2.50 Term Convertible Securities,
Series A, converted and redeemed $ 200,000 --
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
7
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. MANAGEMENT'S 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 to present fairly the condensed financial
position of Wendy's International, Inc. and Subsidiaries (the Company) as
of June 30, 2002 and December 30, 2001 and the condensed results of
operations and comprehensive income (see Note 3) for the quarters and
year-to-date periods ended June 30, 2002 and July 1, 2001 and cash flows
for the year-to-date periods ended June 30, 2002 and July 1, 2001. All of
these financial statements are unaudited with the exception of the December
30, 2001 balance sheet. The Notes to the audited Consolidated Financial
Statements, which are contained in the Financial Statements and Other
Information furnished with the Company's 2002 Proxy Statement, should be
read in conjunction with these Consolidated Condensed Financial Statements.
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 include assumed conversions of
stock options, net of shares assumed to be repurchased from proceeds, and
company-obligated mandatorily redeemable preferred securities, when
dilutive, and the elimination of related expenses, net of income taxes.
Options to purchase 2.7 million shares of common stock in the current
quarter and year-to-date, and 3.4 million shares in the prior year quarter
and year-to-date, were not included in the computation of diluted earnings
per common share. These options were excluded from the calculation because
the exercise price of these options was greater than the average market
price of the common shares in the respective periods, and therefore, they
are antidilutive.
The computations of basic and diluted earnings per common share are shown
below:
QUARTER QUARTER YEAR-TO-DATE YEAR-TO-DATE
ENDED ENDED ENDED ENDED
JUNE 30, 2002 JULY 1, 2001 JUNE 30, 2002 JULY 1, 2001
------------- ------------ ------------- ------------
(In thousands, except per share data)
Income for computation of basic earnings
per common share $ 63,725 $ 56,014 $107,165 $ 94,713
Interest savings (net of income taxes) on
assumed conversions -- 1,598 1,395 3,195
-------- -------- -------- --------
Income for computation of diluted
earnings per common share $ 63,725 $ 57,612 $108,560 $ 97,908
======== ======== ======== ========
Weighted average shares for computation
of basic earnings per common share 110,551 113,849 108,345 114,095
Dilutive stock options 2,199 1,168 1,948 1,185
Assumed conversions 4,405 7,573 5,989 7,573
-------- -------- -------- --------
Weighted average shares for computation
of diluted earnings per common share 117,155 122,590 116,282 122,853
======== ======== ======== ========
Basic earnings per common share $ .58 $ .49 $ .99 $ .83
======== ======== ======== ========
Diluted earnings per common share $ .54 $ .47 $ .93 $ .80
======== ======== ======== ========
8
NOTE 3. CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
- ------------------------------------------------------------------
The components of other comprehensive income (expense) and total comprehensive
income are shown below:
QUARTER QUARTER YEAR-TO-DATE YEAR-TO-DATE
ENDED ENDED ENDED ENDED
JUNE 30, 2002 JULY 1, 2001 JUNE 30, 2002 JULY 1, 2001
------------- ------------ ------------- ------------
(In thousands)
Net income $ 63,725 $ 56,014 $107,165 $ 94,713
Other comprehensive income (expense):
Translation adjustments 21,665 15,768 20,132 (3,093)
-------- -------- -------- --------
Comprehensive income $ 85,390 $ 71,782 $127,297 $ 91,620
======== ======== ======== ========
The translation adjustments change of $5.9 million in the current quarter
reflects a strengthening Canadian dollar in second quarter 2002 versus the prior
year quarter. The $23.2 million translation adjustment change year-to-date
reflects a strengthening of the Canadian dollar in the current year versus a
weakening Canadian dollar last year.
NOTE 4. SEGMENT REPORTING
The Company operates exclusively in the food-service industry and has determined
that its reportable segments are those that are based on the Company's methods
of internal reporting and management structure. The Company's reportable
segments are Wendy's and Tim Hortons. There were no material amounts of revenues
or transfers between reportable segments. The table below presents information
about reportable segments:
WENDY'S TIM HORTONS TOTAL
------- ----------- -----
( In thousands)
QUARTER ENDED JUNE 30, 2002
Revenues $524,962 $159,085 $ 684,047
Income before income taxes 94,614 39,879 134,493
Capital expenditures 61,102 12,917 74,019
QUARTER ENDED JULY 1, 2001
Revenues $470,399 $139,211 $ 609,610
Income before income taxes 85,773 32,378 118,151
Capital expenditures 49,524 17,587 67,111
YEAR-TO-DATE ENDED JUNE 30, 2002
Revenues $994,674 $301,769 $1,296,443
Income before income taxes 167,135 71,375 238,510
Capital expenditures 114,422 32,575 146,997
YEAR-TO-DATE ENDED JULY 1, 2001
Revenues $895,348 $269,800 $1,165,148
Income before income taxes 148,293 60,718 209,011
Capital expenditures 97,586 35,537 133,123
A reconciliation of reportable segment income before income taxes to
consolidated income before income taxes follows:
QUARTER QUARTER YEAR-TO-DATE YEAR-TO-DATE
ENDED ENDED ENDED ENDED
JUNE 30, 2002 JULY 1, 2001 JUNE 30, 2002 JULY 1, 2001
------------- ------------ ------------- ------------
(In thousands)
Income before income taxes $ 134,493 $ 118,151 $ 238,510 $ 209,011
Corporate charges (33,742) (29,239) (69,079) (58,673)
--------- --------- --------- ---------
Consolidated income before income taxes $ 100,751 $ 88,912 $ 169,431 $ 150,338
========= ========= ========= =========
Corporate charges include certain overhead costs and net interest expense.
9
NOTE 5. INTANGIBLE ASSETS
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" (FAS 142) effective December 31, 2001.
FAS 142 provides the accounting guidelines for goodwill and other intangibles.
Under FAS 142, the amortization of goodwill and other indefinite-lived
intangibles is prohibited and these assets must be tested for impairment
annually (or in interim periods if events indicate possible impairment).
In accordance with FAS 142, the Company reclassified approximately $2.5 million
of net intangibles into goodwill and has ceased amortizing goodwill effective
December 31, 2001. The Company has determined that no other intangibles have an
indefinite life, and it will continue to amortize these remaining intangibles
over their current lives.
During the first quarter 2002, the Company assigned goodwill to reporting units
and performed the first step of the transitional impairment tests for goodwill.
The Company has determined its reporting units to be Domestic Wendy's, Canadian
Wendy's, International Wendy's, Tim Hortons Canada and Tim Hortons U.S. The
first step requires the Company to compare the fair value of each reporting unit
as measured by discounted future cash flows, to the carrying value, to determine
if there is an indication that a potential impairment may exist. There is no
indication of impairment and, therefore no impairment write-off is required upon
adoption of FAS 142.
The table below presents amortized and unamortized intangible assets as of June
30, 2002 and December 30, 2001 (in thousands):
JUNE 30, 2002 DECEMBER 30, 2001
------------- -----------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
------------------------------------------ -----------------------------------------
Amortized intangible assets:
Patents and trademarks $11,264 $(1,755) $ 9,509 $10,939 $(1,329) $ 9,610
Purchase options 7,500 (3,626) 3,874 7,500 (3,287) 4,213
Other 2,041 (410) 1,631 6,900 (2,552) 4,348
--------- -------
$ 15,014 $18,171
======== =======
Unamortized intangible assets:
Goodwill $299,601 $41,214
======== =======
The $300 million in goodwill at June 30, 2002 is comprised of $43 million for
Wendy's, $600,000 for Hortons and $256 million related to the Company's
acquisition of Fresh Enterprises, Inc. Please refer to Note 7 for more
information regarding this acquisition.
Total intangibles amortization expense was $484,000 and $964,000 for the quarter
and year-to-date ended June 30, 2002, respectively, and the estimated annual
intangibles amortization expense for each year through 2006 is $1.9 million.
10
In accordance with FAS 142, the quarter and year-to-date ended July 1, 2001 have
not been restated. The table below presents a reconciliation of net income,
basic earnings per common share and diluted earnings per common share as if FAS
142 had been adopted for the quarter and year-to-date ended July 1, 2001. Basic
and diluted earnings per common share for the quarter and year-to-date ended
July 1, 2001 each would have been $.01 higher had FAS 142 been adopted for those
periods.
QUARTER QUARTER YEAR-TO-DATE YEAR-TO-DATE
ENDED ENDED ENDED ENDED
JUNE 30, 2002 JULY 1, 2001 JUNE 30, 2002 JULY 1, 2001
------------- ------------ ------------- ------------
(In thousands, except per share amounts)
Net income $ 63,725 $ 56,014 $ 107,165 $ 94,713
Goodwill amortization (net of tax) -- 639 -- 1,275
----------- ----------- ----------- -----------
Adjusted net income $ 63,725 $ 56,653 $ 107,165 $ 95,988
=========== =========== =========== ===========
Basic earnings per common share $ .58 $ .49 $ .99 $ .83
Goodwill amortization (net of tax) -- .01 -- .01
----------- ----------- ----------- -----------
Adjusted basic earnings per common share $ .58 $ .50 $ .99 $ .84
=========== =========== =========== ===========
Diluted earnings per common share $ .54 $ .47 $ .93 $ .80
Goodwill amortization (net of tax) -- .01 -- .01
----------- ----------- ----------- -----------
Adjusted diluted earnings per common share $ .54 $ .48 $ .93 $ .81
=========== =========== =========== ===========
NOTE 6. RECENT ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" was issued in June 2001. This statement addresses
accounting and reporting standards for legal obligations associated with the
retirement of tangible long-lived assets. The Company is in the process of
evaluating the impact of this statement on its financial statements and will
adopt the provisions of this statement in the first quarter of 2003.
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" was issued in August 2001. This
statement supersedes Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations
- - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions". This
statement addresses accounting and reporting standards for the impairment or
disposal of long-lived assets. This statement was adopted in the first quarter
2002 and currently does not impact the Company's financial statements.
Statement of Financial Accounting Standards (FAS) No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" was issued in April 2002. This statement rescinds FAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt", and an amendment of
that Statement, FAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements". This Statement also rescinds FAS No. 44, "Accounting
for Intangible Assets of Motor Carriers". This statement amends FAS No. 13,
"Accounting for Leases", to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. The
provisions of this statement related to the rescission of FAS No. 4 will be
applied in fiscal years beginning after May 15, 2002. The Company is in the
process of evaluating the impact of this statement on its financial statements
and will adopt the provisions of this statement in the first quarter of fiscal
year 2003.
Statement of Financial Accounting Standards No. 146, "Accounting for Exit or
Disposal Activities" was issued in June 2002. This statement addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with the exit and disposal activities, including
restructuring activities, that are currently accounted for pursuant
11
to the guidance that the Emerging Issues Task Force (EITF) has set forth in EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". This statement also addresses accounting and reporting
standards for costs related to terminating a contract that is not a capital
lease and termination benefits that employees who are involuntarily terminated
receive under the terms of a one-time benefit arrangement or an individual
deferred-compensation contract. This statement will be effective for exit or
disposal activities that are initiated after December 31, 2002. The Company is
in the process of evaluating the impact of this statement on its financial
statements and will adopt the provisions of this statement in the first quarter
of fiscal year 2003.
NOTE 7. ACQUISITIONS AND INVESTMENTS
In 2001, the Company formed a joint venture between Hortons and IAWS
Group/Cuisine de France to build a par-baked goods manufacturing facility in
Canada. The Company has committed to invest $35.5 million in this joint venture,
of which $14.1 million was paid in 2001 and $13.1 million has been paid
year-to-date 2002. In first quarter 2002, the Company finalized an investment of
$9 million for a 45% minority interest in Cafe Express, a fast-casual restaurant
pioneer. Cafe Express currently operates 14 restaurants in Houston, Dallas and
Phoenix. The Company is a guarantor on a revolving credit facility for Cafe
Express up to $3 million. The Company is accounting for both of these
investments using the equity method.
On June 19, 2002, the Company completed its acquisition of Fresh Enterprises,
Inc. ("Baja Fresh"), the owner and operator of the Baja Fresh Mexican Grill
restaurant chain, pursuant to a Merger Agreement dated May 30, 2002. The results
of Baja Fresh's operations have been included in the Company's consolidated
financial statements since June 19, 2002. Baja Fresh owns, operates and
franchises fast-casual restaurants in 16 states and the District of Columbia. At
the date of acquisition, Baja Fresh consisted of 80 company restaurants and 91
franchise restaurants. This acquisition is consistent with the Company's
strategy to invest in opportunities that can add to the Company's long-term
earnings growth.
The purchase price was $275 million, subject to purchase price adjustments, in
exchange for 100% of the stock of Baja Fresh. Total cash paid by the Company in
connection with the transaction in the second quarter was $288 million, and
included $3.5 million in fees paid to third parties and $9.5 million to
reimburse Baja Fresh for investment expenditures made in 2002. The Company used
the proceeds from the issuance of $225 million in 6.2% senior notes due 2014 and
cash on hand to finance the transaction.
This acquisition was accounted for pursuant to Statement of Financial Accounting
Standards No. 141, "Business Combinations". The Company has retained a third
party valuation expert to assist in the valuation of the assets acquired. This
valuation is expected to be complete by December 29, 2002, the end of the
Company's fourth quarter. The following table summarizes the estimated fair
values of the assets acquired and liabilities assumed at the date of
acquisition, however, these fair values are subject to adjustment upon the
completion of the third party valuation.
As of
Baja Fresh Acquisition June 19, 2002
- ---------------------- -------------
(000's)
Current assets $ 4,463
Property and equipment, net 35,977
Goodwill 255,896
Other assets 3,872
--------
Total assets acquired 300,208
--------
Current liabilities 6,210
Long-term debt 6,456
--------
Total liabilities assumed 12,666
--------
Net assets acquired $287,542
========
12
If the acquisition had been completed as of the beginning of the periods
indicated below, pro forma revenues, net income and basic and diluted earnings
per common share would have been as follows:
QUARTER QUARTER YEAR-TO-DATE YEAR-TO-DATE
ENDED ENDED ENDED ENDED
JUNE 30, 2002 JULY 1, 2001 JUNE 30, 2002 JULY 1, 2001
------------- ------------- ------------- -------------
Total revenues $ 710,964 $ 626,931 $ 1,346,117 $ 1,196,394
Net income 60,590 53,570 102,249 89,665
Net income per common share:
Basic $ .55 $ .47 $ .94 $ .79
Diluted $ .52 $ .45 $ .89 $ .76
The selected unaudited pro forma information for the quarters and year-to-date
periods ended June 30, 2002 and July 1, 2001 includes interest expense on the
Company's $225 million of 6.2% senior notes that were issued in conjunction with
the acquisition of Baja Fresh. In addition, the quarter and year-to-date periods
ended July 1, 2001 exclude expenses incurred by Baja Fresh in conjunction with
its previously planned public offering.
The pro forma information is not necessarily indicative of the results of
operations had the acquisition actually occurred at the beginning of each of
these periods, nor is it necessarily indicative of future results.
NOTE 8. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
During the quarter, the Company called for redemption all of its outstanding
$2.50 Term Convertible Securities, Series A ("TECONS"), issued by Wendy's
Financing I, a subsidiary of the Company. By the end of the quarter, 99.9% of
the $200 million in TECONS had been converted. The remainder were redeemed by
the Company. As a result of the conversion, the Company's common shares issued
increased by 7.6 million shares.
NOTE 9. SUBSEQUENT EVENT
On July 3, 2002, the Company announced that its Tim Hortons subsidiary had
signed a definitive agreement to sell its cup manufacturing business to Dopaco
Canada, Inc. ("Dopaco"). The sale, which closed on July 16, 2002, resulted from
a strategic business review by Tim Hortons' management team. The sale generated
$20 million in cash and a one-time pretax gain of $3.9 million, which will be
approximately $.02 per share in third quarter 2002 for the Company. The cup
manufacturing business generated income of about $.01 per share for the Company
in 2001. Under a supply agreement with Dopaco, Tim Hortons has agreed to
purchase a minimum of 50% of its cup and lid supplies from Dopaco over the
period from July 15, 2002 through July 15, 2007. Also as part of this agreement,
Dopaco has agreed to pay Tim Hortons a total of $2.2 million over three years as
a volume purchase incentive.
13
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's diluted earnings per common share increased 14.9% to $.54 in the
current quarter, and 16.3% to $.93 in the year-to-date period. In the quarter,
consolidated revenues, which do not include sales in franchise restaurants,
increased 12.2% to $684 million. Also in the quarter, systemwide sales, which
includes sales of both franchise and company operated restaurants, increased
13.4% to $2.4 billion. Year-to-date, consolidated revenues increased 11.3% to
$1.3 billion and systemwide sales increased 12.6% to $4.5 billion. Same-store
sales increased for Wendy's and Tim Hortons restaurants, both in the U.S. and
Canada during quarter and year-to-date.
WENDY'S
RETAIL SALES
Wendy's retail sales for the second quarter 2002 increased $50.5 million, or
12.6%, to $452.1 million, and $90.5 million, or 11.8%, to $857.6 million for
year-to-date 2002. Of this total, domestic Wendy's retail sales increased 12.4%
to $405.8 million in the quarter, and 11.8% to $772.4 million for the
year-to-date. For domestic company operated Wendy's, average restaurant sales
increased 6.0% to $365,258 per restaurant in the quarter, and 5.6% to $698,278
year-to-date. Average same-store sales in Wendy's domestic company restaurants
increased 6.6% in the quarter and 6.2% for the year- to-date. The average number
of transactions in domestic company operated Wendy's increased 4.2% in the
quarter and 3.5% year-to-date, while the average check increased 2.5% in the
quarter and 2.7% year-to-date. In addition, domestic selling prices increased
..7% in the quarter and 1.0% year-to-date. In the second quarter, the average
number of Wendy's company operated domestic restaurants open increased by 64 and
62, respectively, compared to the prior year quarter and year-to-date.
Canadian Wendy's retail sales increased $4.5 million, or 16.0%, in the second
quarter, and $6.4 million, or 12.0%, for the year-to-date. Canadian Wendy's
average sales for company operated restaurants, in local currency, increased
5.8% in the second quarter and 3.6% for the year-to-date. Same-store sales
increased 7.9% in the second quarter and 5.8% for the year-to-date. The average
number of company stores open increased by twelve compared to the prior year.
Nearly all international company operated restaurants outside of Canada were
shut down with the closures in Argentina in 2000.
FRANCHISE REVENUES
Wendy's franchise revenues, before reserves for uncollectible amounts, increased
$4.0 million, or 5.9%, to $72.8 million in the quarter and $8.8 million, or
6.9%, to $137.1 million year-to-date. Royalties increased $7.2 million, or
13.5%, to $60.5 million in the quarter and $13.2 million, or 13.1%, to $114.3
million year-to-date. Average net sales at franchise domestic restaurants
increased 9.9% to $328,615 per restaurant in the quarter and 9.5% to $623,626
year-to-date. Average same-store sales at franchise domestic restaurants
increased 9.5% for the quarter and 8.9% year-to-date. In the second quarter and
year-to-date, the average number of Wendy's domestic franchise restaurants
increased by 155 and 154, respectively, compared to the prior year quarter and
year-to-date. In local currency, Canadian Wendy's same-store franchise sales
increased 8.8% in the quarter and 7.4% year-to-date, while other international
same-store franchise sales increased .2% for the quarter and .4% for the
year-to-date period. Total Wendy's franchise restaurants open at quarter-end
were 4,835 and 4,715, respectively, in 2002 and 2001.
Asset gains from the sale of company operated restaurants and real estate to
franchisees decreased $3.9 million in the current quarter to a total of $730,000
(pretax) and decreased $5.4 million for the year-to-date period to $1.5 million
(pretax).
COST OF SALES AND RESTAURANT OPERATING COSTS
Wendy's cost of sales increased $27.0 million, or 11.2%, to $267.4 million in
the quarter and $49.2 million, or 10.6%, to $512.5 million year-to-date. Of this
total, Wendy's domestic restaurant cost of sales increased 11.1% to $239.0
million in the quarter and 10.6% to $459.4 million year-to-date. Wendy's
domestic cost of sales as a percent of Wendy's domestic retail sales, decreased
..7% in the quarter and .6% year-to-date. Domestic food costs, as a percent of
domestic retail sales, decreased .6% in the quarter and .5% year-to-date,
reflecting a decrease in beef and chicken costs of 7.0%
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and 4.8%, respectively, in the quarter and 6.1% and 3.7% year-to-date. In
addition, there was a selling price increase of .7% for the quarter and 1.0% for
the year-to-date as compared to the prior year. Domestic labor costs, as a
percent of sales, decreased .3% in the quarter and .2% year-to-date, reflecting
higher average sales. The average crew wage rate increased 1.8% in the quarter
and 2.0% year-to-date.
Wendy's company restaurant operating costs increased $11.4 million, or 11.6%, to
$109.5 million in the quarter and $20.1 million, or 10.4%, to $212.1 million
year-to-date. Of this total, domestic Wendy's company restaurant operating costs
increased 11.6% to $101.0 million in the quarter and 10.7% to $196.0 million
year-to-date. As a percent of retail sales, domestic restaurant costs decreased
..2% in the quarter and .3% year-to-date. The quarter and year-to-date reflected
lower utility costs and the leverage benefit of higher average sales, partly
offset by higher performance-based bonus expense.
The factors discussed above resulted in Wendy's domestic company operating
margin increasing .9% to 17.0% in the quarter and .9% to 15.9% for the
year-to-date.
As a percent of retail sales, Canadian Wendy's cost of sales decreased .8% in
the quarter, reflecting higher average sales. As a percent of retail sales
Canadian Wendy's cost of sales remained even for the year-to-date. Average wage
rates increased 2.4% in the quarter and 2.8% for the year-to-date.
Canadian Wendy's company restaurant operating costs increased $968,000 in the
quarter and $1.2 million year-to-date reflecting the growth of the business.
Nearly all international company operated restaurants outside of Canada were
shut down with the closures in Argentina at year-end 2000.
OPERATING COSTS
Wendy's operating costs increased 23.3% to $4.6 million in the quarter, and
21.6% to $8.9 million for the year-to-date reflecting higher percentage rent due
to higher average sales. Operating costs also increased reflecting the opening
of a second bakery in the second half of 2001.
TIM HORTONS
RETAIL SALES
Tim Hortons (Hortons) retail sales increased $6.8 million, or 7.6%, to $96.7
million in second quarter and $10.4 million, or 6.0%, to $184.3 million for the
year-to-date. Of this total, Canadian warehouse sales (sales of dry goods to
franchisees) increased $9.5 million, or 12.7%, to $83.9 million in the quarter
and $14.9 million, or 10.4%, to $158.2 million for the year-to-date. This
reflected the increase in the number of Hortons' Canadian franchised restaurants
serviced and same-store sales growth in local currency of 9.5% for the quarter
and 8.7% for the year-to-date. Retail sales in the U.S. were $7.6 million in the
quarter and $16.0 million for the year-to-date. Both periods were down from the
prior year, reflecting fewer company operated restaurants as Hortons continued
the strategy of franchising company operated restaurants in the U.S.
FRANCHISE REVENUES
Hortons franchise revenues, before reserves for uncollectible amounts, increased
$13.0 million, or 26.4%, to $62.4 million in second quarter and $21.6 million,
or 22.6%, to $117.4 million for the year-to-date. Canadian royalties increased
17.6% to $12.5 million in the quarter and 14.5% to $23.4 million for the
year-to-date. This reflected same-store sales increases in local currency of
9.5% for the quarter and 8.7% for the year-to-date, and 190 additional franchise
stores. Canadian rental income from restaurants leased to franchisees increased
18.7% to $36.6 million in the quarter and 15.9% to $68.0 million for the
year-to-date. These increases reflected the increase in the number of Canadian
restaurants leased to franchisees and higher average sales (rent is generally
charged as a percent of sales). Franchise fees increased $3.2 million to $8.7
million for the quarter and $5.3 million to $17.3 million for the year-to-date.
COST OF SALES
The Hortons' Canadian warehouse cost of sales increased $8.0 million, or 13.4%,
to $67.3 million in the quarter and $11.9 million, or 10.5% to $125.6 million
for the year-to-date. The increase in each period reflects additional sales to
Canadian franchisees due to the increased number of restaurants serviced and
higher average sales per restaurant. Warehouse cost of sales, as a percent of
warehouse sales, increased to 80.2% in the second quarter 2002 from 79.7% in
2001 and remained unchanged at 79.4% for the year-to-date period. Hortons U.S.
cost of sales were $4.8 million in the
15
quarter and $11.1 million year-to-date. Both periods were down from the prior
year, reflecting the continuing strategy to franchise company operated
restaurants.
OPERATING COSTS
Hortons operating costs increased $5.1 million, or 29.7%, to $22.2 million in
the quarter and $8.5 million, or 24.6%, to $43.0 million for the year-to-date.
Canadian Hortons rent expense increased 9.5% to $8.9 million in the quarter and
8.4% to $17.1 million for the year-to-date, reflecting the growth in the number
of properties being leased and then subleased to Canadian franchisees, as well
as higher percentage rent due to higher sales. Cost of equipment and other
franchise costs increased $2.6 million to $6.7 million in the quarter and $4.2
million to $13.4 million for the year-to-date. Costs of operating and
maintaining Canadian warehouse operations increased 29.7% to $5.5 million in the
quarter and 27.4% to $10.7 million for the year-to-date. Hortons U.S. had an
increase of $746,000 in operating costs for the quarter and $2.7 million for the
year-to-date period, reflecting equipment costs and other costs incurred in the
franchising of four restaurants in the quarter, and eleven restaurants
year-to-date. The operating cost increase also reflects the costs to operate a
coffee manufacturing company opened in 2002.
CONSOLIDATED
GENERAL AND ADMINISTRATIVE EXPENSES
Company general and administrative expenses increased 10.3% to $58.8 million in
the quarter and 7.5% to $115.1 million in the year-to-date period. As a percent
of revenues, costs were .1% lower in the quarter at 8.6% versus 8.7% last year
and .3% lower at 8.9% versus 9.2% for the year-to-date. The dollar increase in
2002 primarily reflects an increase in salaries and benefits, including
performance-based bonus costs.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses for the quarter and year-to-date
increased over 2001 reflecting the Company's information technology initiatives
and additional restaurant development.
INTEREST EXPENSE
Interest expense increased $1.1 million in the quarter and $4.4 million for the
year-to-date period reflecting $200 million of 6.25% senior notes issued by the
Company in the fourth quarter of 2001 and $225 million of 6.20% senior notes
issued by the Company in the current quarter. This was partially offset by the
conversion into common shares of $200 million in term convertible securities in
second quarter 2002.
INTEREST INCOME
Interest income decreased $1.1 million in the quarter and $2.8 million for the
year-to-date period reflecting the low interest income rates available in the
current interest rate environment.
FOREIGN CURRENCY
The primary currency exposure the Company has is to the Canadian dollar. The
results of Wendy's and Tim Hortons' Canadian operations are translated into U.S.
dollars. The change in the Canadian dollar this year versus last year reduced
earnings per share by approximately one cent for the year-to-date 2002, related
to translating Canadian operations. The impact on second quarter 2002 diluted
earnings per share was less than one cent.
COMPREHENSIVE INCOME
Comprehensive income increased $13.6 million in the quarter and $35.7 million
for the year-to-date. Comprehensive income includes net income, which increased
$7.7 million in the quarter and $12.5 million year-to-date, and translation
adjustments caused by changes in foreign currency. The translation adjustments
changed $5.9 million in the current quarter reflecting a strengthening Canadian
dollar in second quarter 2002 versus the prior year quarter. Year-to-date,
translation adjustments changed $23.2 million reflecting a strengthening of the
Canadian dollar in the current year versus a weakening Canadian dollar last year
(see Note 3 to the consolidated condensed financial statements).
FINANCIAL CONDITION
The Company continues to maintain a strong balance sheet to support system
growth and financial flexibility. The long-term debt-to-equity and debt-to-total
capitalization ratios were 48% and 32%, respectively, at June 30, 2002,
reflecting the $200 million in senior notes issued in fourth quarter 2001 and
$225 million in senior notes issued in second quarter 2002. Equity also
increased from the conversion of $200 million in term convertible securities in
the second quarter of
16
2002. Standard & Poor's and Moody's rate the Company's senior unsecured debt
BBB+ and Baa-1, respectively. Cash flow from operations was $198 million for the
year-to-date, and $137 million for the prior year-to-date. Capital expenditures
amounted to $147 million for 2002 compared with $133 million for 2001. The
Company borrowed $225 million, and in addition, used $63 million of cash on hand
to finance the purchase of 100% of the stock of Fresh Enterprises, Inc. ("Baja
Fresh") in second quarter 2002. Baja Fresh owns, operates and franchises
fast-casual restaurants in 16 states and the District of Columbia. Please refer
to Note 7 for more information on this acquisition. The Company has not
repurchased any common shares in 2002, however, the Company announced that it
may repurchase up to $25 million of its common shares during the remainder of
2002.
In 2001, the Company formed a joint venture between Hortons and IAWS
Group/Cuisine de France to build a par-baked goods manufacturing facility in
Canada. The Company has committed to invest $35.5 million in this joint venture,
of which $14.1 million was paid in 2001 and $13.1 million has been paid
year-to-date 2002. On February 28, 2002, the Company finalized an investment of
$9 million for a 45% minority interest in Cafe Express, a fast-casual restaurant
pioneer. Cafe Express currently operates 14 restaurants in Houston, Dallas and
Phoenix. The Company is a guarantor on a revolving credit facility for Cafe
Express up to $3 million. The Company is accounting for both of these
investments using the equity method.
During the quarter, the Company called for redemption all of its outstanding
$2.50 Term Convertible Securities, Series A ("TECONS"), issued by Wendy's
Financing I, a subsidiary of the Company. By the end of the quarter, 99.9% of
the $200 million in TECONS had been converted. The remainder were redeemed by
the Company. As a result of the conversion, the Company's common shares issued
increased by 7.6 million shares.
OUTLOOK
The Company continues to employ its strategic initiatives as outlined in the
Financial Statements and Other Information furnished with the Company's 2002
Proxy Statement. These initiatives include leveraging the Company's core assets,
growing same-store sales, improving store-level productivity to enhance margins,
improving underperforming operations, developing profitable new restaurants and
implementing new technology initiatives. The Company intends to allocate
resources to improve long-term return on assets and invested capital, and 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. New restaurant development continues to be very important.
The Company also intends to evaluate potential mergers, acquisitions, joint
venture investments, alliances, vertical integration opportunities and
divestitures that could add to the Company's long-term earnings growth. The
Company's long-term goal for EPS growth continues to be in the 12% to 15% range,
excluding unusual items. The Company anticipates current year EPS will be in the
$1.90 to $1.95 range. This revision from the previous range of $1.87 to $1.92 is
due to strong business trends at Wendy's and Tim Hortons and takes into
consideration the following items:
- $.02 to $.04 per share dilution in the second half of 2002
from the acquisition of Baja Fresh (see Note 7).
- $.02 per share gain from the sale of Tim Hortons' cup
manufacturing business (see Note 9).
- $.01 per share in asset gains from refranchising Wendy's
company operated restaurants.
The Company currently anticipates that between 515-540 new Wendy's and Hortons
restaurants will be opened systemwide (both company and franchise) during 2002,
subject to the continued ability of the Company and its franchisees to complete
permitting and meet other conditions and to comply with other regulatory
requirements for the completion of stores and to obtain financing for new
restaurant development. In addition, Baja Fresh intends to grow to over 200
stores by year-end. In the second quarter, 86 new restaurants opened, versus 101
new restaurant openings in the prior year quarter. Year-to-date 2002, there have
been 157 new restaurants opened, versus 193 new restaurant openings in the prior
year-to-date.
Cash flow from operations, cash and investments on hand, possible asset sales,
and cash available through existing revolving credit agreements and through the
possible issuance of securities should provide for the Company's projected
short-term and long-term cash requirements, including cash for capital
expenditures, future acquisitions of restaurants from franchisees or other
corporate purposes. The Company is committed to a strong capital structure and
financial profile, and intends to maintain an investment grade rating. If
additional funds are needed for mergers, acquisitions or other strategic
investments, the Company believes it could borrow additional cash and still
maintain its investment grade rating. In the event the Company's rating
declines, the Company may incur an increase in borrowing costs. If the decline
17
in the rating is significant, 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 Company's credit ratings include sales and cost trends,
margins at Wendy's U.S. company restaurants, the Company's cash position, cash
flow, capital expenditures and capitalization, and stability of earnings.
The Company does not have significant term debt maturities until 2005. The
Company believes it will be able to pay or refinance future term debt
obligations based on its strong financial condition and sources of cash
described in the preceding paragraph.
MARKET RISK
The Company's debt is primarily denominated in U.S. dollars, at fixed interest
rates, which limits interest rate risk on financial instruments. Therefore, the
Company does not currently utilize any derivatives to alter interest rate risk.
Currency exposure is predominately related to Canadian operations, since
exposure outside North America is limited to royalties. The Company has cash
flow exposure from Tim Hortons and Wendy's operations in Canada. The Canadian
currency has been reasonably stable over time, however, in recent years the
Canadian dollar has weakened which reduces the U.S. benefit of Canadian
operations. While the Company monitors the situation, it does not currently
hedge its exposure to Canadian currency fluctuations. At the current level of
operating income generated from Canada, if the Canadian currency rate changes
one penny in the quarter, the impact on the Company for the quarter would be
less than $200,000. At current royalty levels outside of North America, if all
foreign currencies moved 10% during each royalty collection period in the same
direction, at the same time, the quarter impact would be approximately $250,000.
Therefore, the Company does not hedge its exposure to currency fluctuations
related to royalty collections outside North America, because it does not
believe the risk is material.
The Company purchases certain products in the normal course of business, which
are affected by commodity prices. Therefore, the Company is exposed to some
price volatility related to weather, and various other market conditions outside
the Company's control. However, the Company does employ various purchasing and
pricing contract techniques, in an effort to minimize volatility. The Company
does not generally make use of financial instruments to hedge commodity prices,
partly because of the contract pricing utilized. While volatility can occur,
which would impact profit margins, there are generally alternative suppliers
available and if the pricing problem is prolonged, the Company has some ability
to increase selling prices to offset the commodity prices.
THE APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
assumptions and estimates that can have a material impact on the results of
operations of the Company. Sales recognition at company operated restaurants is
straightforward as customers pay for products at the time of sale, and inventory
turns over very quickly, with key items counted daily and a complete food
inventory taken weekly. Payments to vendors for products sold in the restaurants
are generally settled within 14 days. The earnings reporting process is covered
by the Company's system of internal controls, and generally does not require
significant management estimates and judgments. However, estimates and judgments
are inherent in the calculations of royalty and other franchise related revenue
collections, legal obligations, pension and other post-retirement benefits,
income taxes, insurance liabilities, various other commitments and contingencies
and the estimation of the useful lives of fixed assets and other long-lived
assets. While management applies its judgment based on assumptions believed to
be reasonable under the circumstances, actual results could vary from these
assumptions. It is possible that materially different amounts would be reported
using different assumptions. This discussion of critical accounting policies is
substantially the same as set forth in the Financial Statements and Other
Information furnished with the Company's Proxy Statement for the 2002 Annual
Meeting of Shareholders, which was incorporated by reference into the Company's
most recent Form 10-K.
The Company collects royalties, and in some cases rent, from franchisees and
Hortons collects distribution revenues from Canadian franchisees. The Company
provides for estimated losses for revenues that are not likely to be collected.
Although the Company enjoys a good relationship with franchisees, and collection
rates are currently very high, if average sales or the financial health of
franchisees were to deteriorate, the Company might have to increase reserves
against collection of franchise revenues.
18
The Company is self-insured for most workers' compensation, health care claims,
general liability and automotive liability losses. The Company records its
insurance liabilities based on historical and industry trends, which are
continually monitored, and accruals are adjusted when warranted by changing
circumstances. Outside actuaries are used to assist in estimating casualty
insurance obligations. Since there are many estimates and assumptions involved
in recording insurance liabilities, differences between actual future events and
prior estimates and assumptions could result in adjustments to these
liabilities.
Pension and other retirement benefits, including all relevant assumptions
required by generally accepted accounting principles, are evaluated each year
with the oversight of the Company's retirement committee. Due to the technical
nature of retirement accounting, outside actuaries are used to provide
assistance in calculating the estimated future obligations. Since there are many
estimates and assumptions involved in retirement benefits, differences between
actual future events and prior estimates and assumptions could result in
adjustments to pension expenses and obligations.
In the normal course of business, the Company must make continuing estimates of
potential future legal obligations and liabilities, which requires the use of
management's judgment on the outcome of various issues. Management may also use
outside legal advice to assist in the estimating process. However, the ultimate
outcome of various legal issues could be different than management estimates,
and adjustments to income could be required.
The Company records income tax liabilities utilizing known obligations and
estimates of potential obligations. A deferred tax asset or liability is
recognized whenever there are future tax effects from existing temporary
differences and operating loss and tax credit carryforwards. The Company records
a valuation allowance to reduce deferred tax assets to the balance that is more
likely than not to be realized. Management must make estimates and judgments on
future taxable income, considering feasible tax planning strategies and taking
into account existing facts and circumstances, to determine the proper valuation
allowance. When the Company determines that deferred tax assets could be
realized in greater or less amounts than recorded, the asset balance and income
statement reflects the change in the period such determination is made. Due to
changes in facts and circumstances and the estimates and judgments that are
involved in determining the proper valuation allowance, differences between
actual future events and prior estimates and judgments could result in
adjustments to this valuation allowance. The Company uses an estimate of its
annual effective tax rate at each interim period based on the facts and
circumstances available at that time, while the actual effective tax rate is
calculated at year-end.
Depreciation and amortization are recognized using the straight-line method in
amounts adequate to amortize costs over the following estimated useful lives:
buildings, up to 40 years; leasehold improvements, up to 25 years; restaurant
equipment, up to 15 years; other equipment, up to 10 years; and property under
capital leases, the primary lease term. The Company estimates useful lives on
buildings and equipment based on historical data and industry trends. Long-lived
assets are grouped into operating markets and tested for impairment whenever an
event occurs that indicates that an impairment may exist. The Company tests for
impairment using the cash flows of the operating markets. A significant
deterioration in the cash flows of an operating market or other circumstances
may trigger impairment testing. The Company capitalizes certain internally
developed software costs which are amortized over a ten-year period. The Company
monitors its capitalization and amortization policies to ensure they remain
appropriate. The Company tests goodwill for impairment annually (or in interim
periods if events or changes in circumstances indicate that its carrying amount
may not be recoverable) by comparing the fair value of each reporting unit as
measured by discounted cash flows, to the carrying value, to determine if there
is an indication that a potential impairment may exist. In calculating the
discounted cash flows, the Company used a discount rate of 6.75% and assumed a
3% increase in cash flows per year. The Company will review these assumptions
each time goodwill is tested for impairment and will make the appropriate
adjustments based on facts and circumstances available at that time.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards (FAS) No. 142
"Goodwill and Other Intangible Assets", in first quarter 2002. In accordance
with FAS 142, the Company reclassified approximately $2.5 million of net
intangibles into goodwill at year-end 2001 and the Company is no longer
recording amortization on goodwill effective December 31, 2001. The Company has
determined that its goodwill is not impaired. Please refer to Note 5 to the
Company's Consolidated Financial Statements for more detailed disclosures
concerning FAS 142.
19
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" was issued in June 2001. This statement addresses
accounting and reporting standards for legal obligations associated with the
retirement of tangible long-lived assets. The Company is in the process of
evaluating the impact of this statement on its financial statements and will
adopt the provisions of this statement in the first quarter of 2003.
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" was issued in August 2001. This
statement supersedes Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations
- - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions". This
statement addresses accounting and reporting standards for the impairment or
disposal of long-lived assets. This statement was adopted in first quarter 2002
and currently, does not materially impact the Company's financial statements.
Statement of Financial Accounting Standards (FAS) No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" was issued in April, 2002. This statement rescinds FAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt", and an amendment of
that Statement, FAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements". This Statement also rescinds FAS No. 44, "Accounting
for Intangible Assets of Motor Carriers". This Statement amends FAS No. 13,
"Accounting for Leases", to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. The
provisions of this statement related to the rescission of FAS No. 4 will be
applied in fiscal years beginning after May 15, 2002. The Company is in the
process of evaluating the impact of this statement on its financial statements
and will adopt the provisions of this statement in the first quarter of fiscal
year 2003.
Statement of Financial Accounting Standards No.146, "Accounting for Exit or
Disposal Activities" was issued in June 2002. This statement addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with the exit and disposal activities, including
restructuring activities, that are currently accounted for pursuant to the
guidance that the Emerging Issues Task Force (EITF) has set forth in EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". This statement also addresses accounting and reporting
standards for costs related to terminating a contract that is not a capital
lease and termination benefits that employees who are involuntarily terminated
receive under the terms of a one-time benefit arrangement or an individual
deferred-compensation contract. This statement will be effective for exit or
disposal activities that are initiated after December 31, 2002. The Company is
in the process of evaluating the impact of this statement on its financial
statements and will adopt the provisions of this statement in the first quarter
of fiscal year 2003.
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 Company's 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; risks 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; the ability of the Company to successfully complete
transactions designed to improve its return on investment; and other factors set
forth in Exhibit 99 (a) attached hereto.
20
The number of systemwide restaurants open as of June 30, 2002 and July 1, 2001
was as follows:
2002 2001
----- -----
WENDY'S
Company 1,248 1,159
Franchise 4,835 4,715
----- -----
Total Wendy's 6,083 5,874
===== =====
TIM HORTONS
Company 77 106
Franchise 2,134 1,941
----- -----
Total Tim Hortons 2,211 2,047
===== =====
BAJA FRESH
Company 81 52
Franchise 91 66
----- -----
Total Baja Fresh 172 118
===== =====
Total System 8,466 8,039
===== =====
PART II: OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders.
(a) The Annual Meeting of the Company's shareholders was held on May 1,
2002.
(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
-------- --- --------
Thekla R. Shackelford 86,843,585 1,219,208
John T. Schuessler 86,576,886 1,485,909
Kerrii B. Anderson 86,873,228 1,189,566
William E. Kirwan 86,823,722 1,239,072
The following directors did not stand for reelection at the meeting (the year in
which each director's term expires is indicated in parenthesis): James V.
Pickett (2003), Thomas F. Keller (2003), Andrew G. McCaughey (2003), David P.
Lauer (2003), James F. Millar (2003), Ernest S. Hayeck (2004), Janet Hill
(2004), True H. Knowles (2004) and Paul D. House (2004).
21
(c) The following table sets forth the brief description of each other matter
voted on at the Annual Meeting and the number of votes cast for, against
or abstaining from, as well as broker nonvotes on each matter:
Broker
For Against Abstain Nonvotes
---------- --------- ------- ----------
Approve an amendment to the
Company's Regulations to
permit the Directors to set the
number of Directors, and the
number of Directors in each
class, within a specified range 72,900,341 2,382,348 839,397 11,940,708
Approve the Senior Executive
Annual Performance Plan 79,689,114 7,523,194 850,466 None
Approve an amendment to the
Company's Regulations to revise
the minimum numbers of Directors
required on any committee of the
Board of Directors from three to one 68,026,393 7,322,609 773,089 11,940,706
Item 6. Exhibits and Reports on Form 8-K
(a) Index to Exhibits on Page 24.
(b) The Company filed two reports on Form 8-K for the quarter ended June
30, 2002. The first report on Form 8-K was filed May 31, 2002 and
announced (under item 5) the signing of a definitive agreement to
acquire Fresh Enterprises, Inc. ("Baja Fresh"), the owner and operator
of the Baja Fresh Mexican Grill restaurant chain. A copy of the press
release issued May 31, 2002 was attached.
The second report on Form 8-K was filed June 19, 2002 and announced
(under item 2) the completion of the Company's acquisition of Baja
Fresh on June 19, 2002 pursuant to a Merger Agreement dated May 30,
2002 (the "Agreement"). A copy of the Agreement was attached to the
filing.
22
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
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.
WENDY'S INTERNATIONAL, INC.
---------------------------
(Registrant)
Date: 8/12/02 /s/ Kerrii B. Anderson
-------- ------------------------------------
Kerrii B. Anderson
Executive Vice President and
Chief Financial Officer
23
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit
Number Description Page No.
------ ----------- --------
99(a) Safe Harbor Under 25 - 26
the Private Securities
Litigation Reform Act of 1995
99(b) Certification of 27
Chief Executive Officer
99(c) Certification of 28
Chief Financial Officer
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.
24