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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 March 30, 2003
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number 1-8116
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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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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 May 4, 2003
- -------------------------------- --------------------------
Common shares, $.10 stated value 113,461,000 shares
Exhibit index on page 29.
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
Pages
-----
PART I: Financial Information
Item 1. Financial Statements:
Consolidated Condensed Statements of Income for the quarters
ended March 30, 2003 and March 31, 2002 3
Consolidated Condensed Balance Sheets as of March 30, 2003
and December 29, 2002 4 - 5
Consolidated Condensed Statements of Cash Flows for the
quarters ended March 30, 2003 and March 31, 2002 6
Notes to the Consolidated Condensed Financial Statements 7 - 13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14 - 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 24
PART II: Other Information
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
Certifications 27 - 28
Index to Exhibits 29
Exhibit 99(a) 30 - 31
Exhibit 99(b) 32
Exhibit 99(c) 33
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
MARCH 30, 2003 MARCH 31, 2002
-------------- --------------
REVENUES
Retail sales $559,871 $493,087
Franchise revenues 134,153 119,309
--------- --------
694,024 612,396
--------- --------
COSTS AND EXPENSES
Cost of sales 363,336 314,276
Company restaurant operating
costs 121,288 106,627
Operating costs 30,686 25,156
General and administrative
expenses 64,777 56,250
Depreciation and amortization
of property and equipment 38,081 32,742
Other income (3,205) (602)
Interest expense 11,528 10,673
Interest income (1,051) (1,406)
--------- --------
625,440 543,716
--------- --------
INCOME BEFORE INCOME TAXES 68,584 68,680
INCOME TAXES 24,691 25,240
--------- --------
NET INCOME $ 43,893 $ 43,440
========= ========
BASIC EARNINGS PER COMMON SHARE $.38 $.41
==== ====
DILUTED EARNINGS PER COMMON SHARE $.38 $.39
==== ====
DIVIDENDS PER COMMON SHARE $.06 $.06
==== ====
BASIC SHARES 114,410 106,139
========= ========
DILUTED SHARES 115,032 115,410
========= ========
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
3
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
MARCH 30, 2003 DECEMBER 29, 2002
-------------- -----------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 126,867 $ 171,944
Accounts receivable, net 83,603 86,416
Notes receivable, net 9,232 11,204
Deferred income taxes 12,217 13,822
Inventories and other 44,328 47,433
----------- -----------
276,247 330,819
----------- -----------
PROPERTY AND EQUIPMENT 2,664,090 2,594,571
Accumulated depreciation and
amortization (780,431) (743,305)
----------- -----------
1,883,659 1,851,266
----------- -----------
NOTES RECEIVABLE, NET 20,226 20,548
GOODWILL, NET 273,515 272,325
DEFERRED INCOME TAXES 53,936 48,966
INTANGIBLE ASSETS, NET 46,966 47,393
OTHER ASSETS 101,471 96,044
----------- -----------
$ 2,656,020 $ 2,667,361
=========== ===========
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)
MARCH 30, 2003 DECEMBER 29, 2002
-------------- -----------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 93,745 $ 134,208
Accrued expenses:
Salaries and wages 31,366 44,932
Taxes 71,677 77,956
Insurance 40,039 42,898
Other 63,082 55,308
Current portion of long-term
obligations 4,937 4,773
----------- -----------
304,846 360,075
----------- -----------
LONG-TERM OBLIGATIONS
Term debt 626,419 627,053
Capital leases 59,067 54,626
----------- -----------
685,486 681,679
----------- -----------
DEFERRED INCOME TAXES 111,969 108,906
OTHER LONG-TERM LIABILITIES 74,992 68,096
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, Authorized: 250,000 shares
Common stock, $.10 stated value per share,
Authorized: 200,000,000 shares,
Issued and Exchangeable:
114,892,000 and 114,692,000 shares,
respectively 11,489 10,895
Capital in excess of stated value 4,211 -
Retained earnings 1,531,882 1,498,607
Accumulated other comprehensive expense (32,964) (60,897)
----------- -----------
1,514,618 1,448,605
Treasury stock at cost:
1,397,000 shares at March 30, 2003 (35,891) -
----------- -----------
1,478,727 1,448,605
----------- -----------
$ 2,656,020 $ 2,667,361
=========== ===========
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
5
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
QUARTER QUARTER
ENDED ENDED
MARCH 30, 2003 MARCH 31, 2002
-------------- --------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 63,165 $ 73,284
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from property dispositions 5,359 5,795
Capital expenditures (68,836) (72,978)
Acquisition of franchises (3,763) (746)
Principal payments on notes receivable 5,235 5,988
Investment in joint venture and other (4,044) (16,272)
Other investing activities (1,948) (647)
--------- ---------
Net cash used in investing activities (67,997) (78,860)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from employee stock
options exercised 3,693 34,192
Repurchase of common stock (35,891) -
Principal payments on long-term
obligations (1,166) (1,059)
Dividends paid on common and
exchangeable shares (6,881) (6,397)
--------- ---------
Net cash provided by (used in) financing
activities (40,245) 26,736
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(45,077) 21,160
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 171,944 111,121
--------- ---------
$ 126,867 $ 132,281
========= =========
CASH AND CASH EQUIVALENTS AT END OF PERIOD
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $ 1,521 $ 4,084
Income taxes paid 35,958 14,415
Capitalized lease obligations incurred 3,357 2,025
The accompanying Notes are an integral part of the Consolidated
Condensed Financial Statements.
6
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 March 30, 2003 and
December 29, 2002 and the condensed results of operations and comprehensive
income (see Note 4) for the quarters ended March 30, 2003 and March 31, 2002 and
cash flows for the quarters ended March 30, 2003 and March 31, 2002. All of
these financial statements are unaudited with the exception of the December 29,
2002 balance sheet, which is derived from audited financial statements. The
Notes to the audited Consolidated Financial Statements, which are contained in
the Company's Form 10-K/A filed on April 22, 2003, 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 the proceeds, and company-obligated mandatorily
redeemable preferred securities converted in the second quarter of 2002, when
outstanding and dilutive, and the elimination of after-tax related expenses.
Options to purchase 7.8 million shares of common stock were not included in the
computation of diluted earnings per common share for the first quarter 2003.
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 quarter, and therefore, they are antidilutive. There were no options
excluded from the computation of diluted earnings per common share for the first
quarter 2002 as they were all dilutive.
The computations of basic and diluted earnings per common share are shown below:
QUARTER QUARTER
ENDED ENDED
MARCH 30, 2003 MARCH 31, 2002
-------------- --------------
(In thousands, except per share data)
Income for computation of basic earnings per common share $ 43,893 $ 43,440
Interest savings (net of income taxes) on assumed conversions - 1,604
-------- --------
Income for computation of diluted earnings per common share $ 43,893 $ 45,044
======== ========
Weighted average shares outstanding for computation of basic earnings
per common share 114,410 106,139
Dilutive stock options 622 1,698
Assumed conversions - 7,573
-------- --------
Weighted average shares outstanding for computation of diluted earnings
per common share 115,032 115,410
======== ========
Basic earnings per common share $.38 $.41
==== ====
Diluted earnings per common share $.38 $.39
==== ====
7
NOTE 3. STOCK OPTIONS
The Company has various stock option plans that provide options for certain
employees and outside directors to purchase common shares of the Company. The
Company uses the intrinsic value method to account for stock-based employee
compensation as defined in Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees.
The pro forma disclosures below are provided as if the Company had adopted the
fair value-based recognition method requirements under Statement of Financial
Accounting Standards ("SFAS") No. 123 - "Accounting for Stock-Based
Compensation", as amended by SFAS No. 148.
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model. This model requires the use of
subjective assumptions that can materially affect fair value estimates, and
therefore, this model does not necessarily provide a reliable single measure of
the fair value of the Company's stock options.
In calculating the fair value of options issued under the 1990 Plan for key
employees and outside directors, the Company has used the following assumptions
for first quarter 2003 and first quarter 2002, respectively: (1) dividend yield
of .8%, (2) expected volatility of 34% and 33%, (3) risk-free interest rate of
3.0% and 4.6% and (4) expected lives of 4.9 years. The per share weighted
average fair value of options granted during first quarter 2003 and first
quarter 2002 was $8.50 and $10.75, respectively.
Had compensation expense been recognized for stock-based compensation plans in
accordance with provisions of SFAS No. 123, the Company would have recorded net
income and earnings per share as follows:
(In millions, except per share data) 2003 2002
---- ----
Net income $43.9 $43.4
Add: Stock compensation cost recorded under APB
Opinion No. 25, net of tax .3 -
Deduct: Stock compensation cost calculated under SFAS
No. 123, net of tax (3.0) (2.1)
----- -----
Pro forma net income $41.2 $41.3
===== =====
Earnings per share:
Basic as reported $ .38 $ .41
Basic pro forma $ .36 $ .39
Diluted as reported $ .38 $ .39
Diluted pro forma $ .36 $ .38
NOTE 4. CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
The components of other comprehensive income (expense) and total comprehensive
income are shown below:
QUARTER QUARTER
ENDED ENDED
MARCH 30, 2003 MARCH 31, 2002
-------------- --------------
(In thousands)
Net income $43,893 $43,440
Other comprehensive income (expense):
Translation adjustments and other 27,933 (1,533)
------- -------
Total Comprehensive income $71,826 $41,907
======= =======
The change of $29.5 million between years primarily reflects a strengthening of
the Canadian dollar versus a relatively stable Canadian dollar during the first
quarter last year.
8
NOTE 5. SEGMENT REPORTING
The Company operates exclusively in the food-service industry and has determined
its reportable segments based on the Company's methods of internal reporting and
management structure. The Company's reportable segments are Wendy's, Tim Hortons
and Baja Fresh. There were no material amounts of revenues or transfers among
reportable segments. The following table presents information about reportable
segments:
(In thousands)
---------------------------------------------------------------
WENDY'S TIM HORTONS BAJA FRESH TOTAL
------- ----------- ---------- -----
QUARTER ENDED MARCH 30, 2003
Revenues $486,987 $172,841 $ 34,196 $694,024
% of total 70.2% 24.9% 4.9% 100.0%
Income before interest and income taxes 48,761 38,824 442 88,027
% of total 55.4% 44.1% .5% 100.0%
Capital expenditures 41,225 21,841 5,770 68,836
Goodwill, net 43,973 453 229,089 273,515
QUARTER ENDED MARCH 31, 2002
Revenues $469,712 $142,684 $ - $612,396
% of total 76.7% 23.3% - 100.0%
Income before interest and income taxes 56,391 31,496 - 87,887
% of total 64.2% 35.8% - 100.0%
Capital expenditures 53,320 19,658 - 72,978
Goodwill, net 43,074 617 - 43,691
A reconciliation of reportable segment income before income taxes to
consolidated income before income taxes follows:
(In thousands)
-------------------------------------------------
QUARTER QUARTER
ENDED ENDED
MARCH 30, 2003 MARCH 31, 2002
-------------- --------------
Income before income taxes $ 88,027 $ 87,887
Corporate charges (1) (19,443) (19,207)
-------- --------
Consolidated income before income taxes $ 68,584 $ 68,680
======== ========
(1) Corporate charges include certain overhead costs and interest income and
expense. In the fourth quarter of 2002, the Company revised the allocation
of costs between the Wendy's segment and corporate charges as a result of a
change in its methods of internal reporting and management structure. The
prior year quarter amounts have been reclassified to conform with the
current year presentation.
NOTE 6. INTANGIBLE ASSETS
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets" (SFAS No. 142) effective December
31, 2001. SFAS No. 142 provides the accounting guidelines for goodwill and other
intangibles. Under SFAS No. 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). The Company tested for goodwill impairment as of year-end 2002, and
no impairment was indicated.
9
The table below presents amortizable and unamortizable intangible assets as of
March 30, 2003 and December 29, 2002 (in thousands):
MARCH 30, 2003 DECEMBER 29, 2002
--------------------------------------------------------------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
------------------------------------------ ------------------------------------------
Amortizable intangible assets:
Patents and trademarks $42,503 $(3,236) $ 39,267 $42,197 $(2,732) $ 39,465
Purchase options 7,500 (4,135) 3,365 7,500 (3,966) 3,534
Other 5,313 (979) 4,334 5,190 (796) 4,394
-------- ---------
$ 46,966 $ 47,393
======== =========
Unamortizable intangible assets:
Goodwill $273,515 $ 272,325
======== =========
Total intangibles amortization expense was $811,000 for first quarter 2003 and
$480,000 for first quarter 2002. The estimated annual intangibles amortization
expense for each year through 2007 is $3.2 million. The $1.2 million increase in
goodwill from December 29, 2002 primarily reflects the acquisition of eight
franchise stores by Wendy's of Canada in the first quarter of 2003.
NOTE 7. ACQUISITIONS AND INVESTMENTS
In 2001, the Company formed a joint venture between Tim Hortons ("Hortons") and
IAWS to build a par-baked goods manufacturing facility in Canada. The joint
venture is owned and jointly controlled on a fifty-fifty basis by Hortons and
IAWS. The Company has committed to invest approximately $49.6 million in this
joint venture, of which $35.7 million was paid through December 29, 2002, and
$4.0 million was paid in first quarter 2003.
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. If the acquisition had been completed
as of the beginning of the first quarter of 2002, pro forma revenues, net income
and basic and diluted earnings per common share would have been as follows (in
thousands, except per share amounts):
QUARTER
ENDED
MARCH 31, 2002
--------------
Total revenues $635,153
Net income $ 41,469
Earnings per common share:
Basic $.39
Diluted $.37
The above selected unaudited pro forma information for the quarter ended March
31, 2002 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.
The pro forma information is not necessarily indicative of the results of
operations had the acquisition actually occurred at the beginning of the period
nor is it necessarily indicative of future results.
10
NOTE 8. GUARANTEES AND INDEMNIFICATIONS
The following table summarizes guarantees of the Company which are primarily
comprised of certain lease and debt obligations related to franchisees and
leases assigned to non-franchisees.
BALANCE AT
(In thousands): MARCH 30, 2003
--------------
Franchisee lease and
loan guarantees:
Wendy's $122,139
Baja Fresh 4,384
--------
Total $126,523
========
Contingently liable
rent on leases:
Wendy's $ 22,080
========
Letters of credit:
Wendy's $ 6,613
Tim Hortons 2,430
--------
$ 9,043
========
Total Guarantees $157,646
========
In addition to the above guarantees, 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. Effective January 1, 2003 the
Company adopted FIN No. 45 "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others". In accordance with FIN No. 45 and based on available information, the
Company accrued $.2 million in the first quarter of 2003 for guarantees and
indemnities entered into between January 1, 2003 and March 30, 2003.
NOTE 9. DEBT
In the first quarter of 2003 the Company took two steps to increase its
financial flexibility to respond to potential opportunities and longer term cash
requirements.
On January 30, 2003, the Company filed a shelf registration statement on Form
S-3 with the Securities and Exchange Commission which increased its capacity to
issue securities to $500 million. As of March 30, 2003, no securities under the
Company's shelf registration statement were issued.
In the first quarter of 2003 the Company also entered into a new $200 million
revolving credit facility that replaced the six revolving credit facilities
totaling $200 million that were previously in place. The new revolving credit
facility contains various covenants which, among other things, require the
maintenance of certain ratios, including indebtedness to total capitalization
and a fixed charge coverage ratio and limits on the amount of assets that can be
sold and liens that can be placed on the Company's assets. At March 30, 2003,
the Company was in compliance with its covenants under the revolving credit
facility and no amounts under the revolving credit facility were outstanding.
NOTE 10. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations". This Statement addresses accounting and reporting
standards for legal obligations associated with the retirement of tangible
long-lived assets. The Company adopted this Statement in first quarter 2003 and
its provisions did not have a significant impact on the Company's financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4, 44, and
64, Amendment of SFAS No. 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of
11
Debt", and an amendment of that, SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements". This Statement also rescinds SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers". This Statement amends SFAS
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 SFAS No. 4, are
effective for fiscal years beginning after May 15, 2002. The Company adopted
these provisions in the first quarter 2003. The remaining provisions of this
Statement were adopted by the Company for transactions occurring after May 15,
2002. The adoption of SFAS No. 145 has not resulted in a significant impact to
the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". 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 is effective for exit or disposal activities that are initiated after
December 31, 2002. The Company adopted SFAS No. 146 in first quarter 2003. Such
adoption did not result in a significant impact to the Company's financial
statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting of Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS No. 123". This
Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. Under the provisions of SFAS No.
148, companies that choose to adopt the accounting provisions of SFAS No. 123
will be permitted to select from three transition methods: Prospective method,
Modified prospective method and Retroactive restatement method. The transition
and annual disclosure provisions of SFAS No. 148 are effective for fiscal years
ending after December 15, 2002. The Company will continue to follow the
disclosure requirements of SFAS No. 123, as amended by SFAS No. 148.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This Statement amends and
clarifies the accounting guidance on derivative instruments (including certain
derivative instruments embedded in other contracts) and hedging activities that
fall within the scope of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". SFAS No. 149 also amends certain other existing
pronouncements, which will result in more consistent reporting of contracts that
are derivatives in their entirety or that contain embedded derivatives that
warrant separate accounting. SFAS No. 149 is effective for contracts entered
into or modified after June 30, 2003, with certain exceptions, and for hedging
relationships initiated after June 30, 2003. The guidance outlined in this
Statement is to be applied prospectively. The Company is in the process of
evaluating the impact of this Statement on its financial statements and will
adopt the provisions in the third quarter of 2003.
FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others - an interpretation of SFAS 5, 57 and 107 and rescission of FIN No. 34"
was issued in November 2002. This Interpretation addresses the disclosures to be
made by a guarantor in its interim and annual financial statements about
obligations under guarantees. This Interpretation clarifies that a guarantor is
required to recognize, at the inception of the guarantee, a liability for the
fair value of the obligation undertaken in the issuing of the guarantee. FIN No.
45 does not prescribe a specific approach for subsequently measuring the
guarantor's recognized liability over the term of the related guarantee. This
Interpretation also incorporates, without change, the guidance of FIN No. 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others", which is being
superseded. The recognition provisions of FIN No. 45 are effective for any
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim and annual
periods after December 15, 2002. The Company
12
adopted the disclosure requirements of FIN No. 45 in fourth quarter 2002 and
the recognition provisions in first quarter 2003. Such adoption did not result
in a significant impact to the Company's financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities - an interpretation of "Accounting Research Bulletin" ("ARB") No. 51".
This Interpretation clarifies the application of the majority voting interest
requirement of ARB No. 51, "Consolidated Financial Statements", to certain types
of variable interest entities that do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The controlling financial interest may be achieved
through arrangements that do not involve voting interests. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies to the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that is acquired before February 1, 2003. The Interpretation applies to
public enterprises as of the beginning of the applicable interim or annual
period, and it applies to nonpublic enterprises as of the end of the applicable
annual period. FIN No. 46 may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
The Company utilizes various advertising funds ("Funds") to administer its
advertising programs. These Funds collect money from franchise and company
operated restaurants to be used for mutually beneficial marketing programs. The
Company is in the process of evaluating the impact of this Interpretation on its
financial statements, including the classification of these Funds under FIN No.
46. The Company adopted the disclosure provisions of this Interpretation in the
fourth quarter of 2002 and will adopt the remaining provisions in the third
quarter of 2003. If it were determined that the consolidation of these Funds
would be required under FIN No. 46, the Company does not expect this to have a
material impact to annual consolidated net income.
In November 2002, the EITF released EITF No. 02-16, "Accounting by a Reseller
for Cash Consideration Received from a Vendor". EITF No. 02-16 provides guidance
on the recognition of cash consideration received by a customer from a vendor.
EITF No. 02-16 is effective for transactions entered into or modified after
December 31, 2002. The Company adopted the provisions of EITF No. 02-16 in first
quarter 2003. Such adoption did not result in a significant impact to the
Company's financial statements.
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 net income increased 1% to $43.9 million while diluted earnings
per common share was $.38 in the first quarter 2003 versus $.39 in 2002. Baja
Fresh was purchased in June 2002 and is included in the current year's results.
The overall impact of Baja Fresh, including interest expense on the senior notes
issued in connection with the acquisition and Baja Fresh net income, was a
decrease of approximately $.02 in earnings per share in the first quarter of
2003 compared to the prior year. Systemwide sales, which includes sales of both
franchise and company operated restaurants, increased 7.1% to $2.3 billion.
Same-store sales increased for Tim Hortons restaurants in the quarter, both in
the U.S. and Canada. Same-store sales decreased for Wendy's and Baja Fresh
restaurants during the quarter.
REVENUES
INCREASE FROM
QUARTER ENDED PRIOR YEAR
(in thousands): % of % of
March 30, 2003 Total March 31, 2002 Total Dollars Percentage
-------------- ----- -------------- ----- ------- ----------
Retail sales
Wendy's $421,297 75.3% $405,458 82.2% $ 15,839 3.9%
Tim Hortons 106,435 19.0% 87,629 17.8% 18,806 21.5%
Baja Fresh 32,139 5.7% - - 32,139 -
-------- -------- --------
$559,871 100.0% $493,087 100.0% $ 66,784 13.5%
======== ======== ========
Franchise revenues
Wendy's $ 65,690 49.0% $ 64,254 53.9% $ 1,436 2.2%
Tim Hortons 66,406 49.5% 55,055 46.1% 11,351 20.6%
Baja Fresh 2,057 1.5% - - 2,057 -
-------- -------- --------
$134,153 100.0% $119,309 100.0% $ 14,844 12.4%
======== ======== ========
Total Revenues
Wendy's $486,987 70.2% $469,712 76.7% $ 17,275 3.7%
Tim Hortons 172,841 24.9% 142,684 23.3% 30,157 21.1%
Baja Fresh 34,196 4.9% - - 34,196 -
-------- -------- --------
$694,024 100.0% $612,396 100.0% $ 81,628 13.3%
======== ======== ========
WENDY'S
- -------
RETAIL SALES
Total Wendy's retail sales for the first quarter 2003 increased $15.8 million,
or 3.9%, to $421.3 million. Of this total, domestic Wendy's retail sales
increased $13.2 million, or 3.6%, to $379.8 million in the quarter. For domestic
company operated Wendy's restaurants, average sales decreased 4.0% to $319,691
per restaurant in the quarter, but the average number of restaurants increased
by 87 compared to the prior year. Average same-store sales in Wendy's domestic
company restaurants decreased 3.1% in the quarter. The average number of
transactions in domestic company operated Wendy's restaurants decreased 2.9% in
the quarter while the average check decreased .2%. Domestic selling prices
increased .5% in the quarter.
Canadian Wendy's retail sales increased $2.6 million, or 10.0%, in the first
quarter. Approximately half of this increase is due to strengthening of the
Canadian dollar. Also, at quarter-end, the Company operated 142 Canadian Wendy's
restaurants versus 127 in 2002. Canadian Wendy's average sales for company
operated restaurants, in local currency,
14
decreased 2.0% in the first quarter and same-store sales decreased .4%. Outside
of North America, the Company only operates two stores.
FRANCHISE REVENUES
Total Wendy's franchise revenues increased $1.4 million, or 2.2%, to $65.7
million in the quarter. Royalties increased $.8 million, or 1.5%, to $54.6
million in the quarter. Average net sales at franchise domestic restaurants
decreased 1.5% to $290,590 per restaurant in the quarter, while the total number
of domestic Wendy's franchise restaurants increased by 135 (net) to 4,376.
Average same-store sales at franchise domestic restaurants decreased 1.7% for
the quarter. In local currency, Canadian Wendy's same-store franchise sales
decreased 1.4% in the quarter, while other international same-store franchise
sales increased .6% for the quarter.
TIM HORTONS
- -----------
The significant majority of Hortons operations are in Canada. The strengthening
of the Canadian dollar in the first quarter of 2003 versus first quarter 2002
increased amounts reported in U.S. dollars from Hortons on average by
approximately 5.5%.
RETAIL SALES
Total Hortons retail sales increased $18.8 million, or 21.5%, to $106.4 million
in the first quarter. The strengthening of the Canadian dollar accounted for
approximately $4 million of the increase. Of the remaining $14.8 million, or
16%, increase, Canadian warehouse sales (sales of dry goods to franchisees)
increased $17.9 million, or 23%, from $74.0 million last year. This reflected a
171 increase in the number of Hortons' Canadian franchised restaurants serviced
and same-store sales growth in local currency of 3.9% for the quarter. Retail
sales in the U.S. were $5.6 million in the quarter, down $2.7 million 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
Total Hortons franchise revenues increased $11.4 million, or 20.6%, to $66.4
million in first quarter. The strengthening of the Canadian dollar accounted for
approximately $3 million of the increase. Of the remaining $8.4 million, or 15%,
increase, Canadian rental income from restaurants leased to franchisees
increased $5.0 million, or 16.0% in the quarter. The increase 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). Canadian
royalties also increased $1.4 million, or 13.3%, in the quarter. This reflected
same-store sales increases in local currency of 3.9% for the quarter, and 171
additional franchise stores on a net basis. Total Hortons franchise fees
increased $1.1 million to $10.1 million for the quarter, reflecting an increase
in the number of businesses sold to franchisees.
BAJA FRESH
- ----------
Baja Fresh was purchased June 19, 2002 and therefore is not included in the
Company's results in the first quarter of 2002.
RETAIL SALES
Total Baja Fresh retail sales were $32.1 million for the first quarter 2003.
Same-stores sales in Baja Fresh company operated restaurants increased .1% for
the quarter. As of March 30, 2003, there were 102 Baja Fresh company operated
restaurants.
FRANCHISE REVENUES
Total Baja Fresh franchise revenues, were $2.1 million in the quarter. Of this
total, royalties were $1.6 million and the remainder was comprised of franchise
fees. Same-store sales at Baja Fresh franchise restaurants decreased 3.5% in the
quarter. As of March 30, 2003, there were 124 Baja Fresh franchise restaurants.
15
COST OF SALES, COMPANY RESTAURANT OPERATING COSTS, AND OPERATING COSTS
(in thousands):
Increase/(Decrease)
Quarter Ended From Prior Year
------------------------------------ -----------------------------
March 30, 2003 March 31, 2002 Dollars Percentage
-------------- -------------- ------- ----------
Cost of sales
- -------------
Wendy's $257,973 $245,135 $ 12,838 5.2%
Tim Hortons 84,150 69,141 15,009 21.7%
Baja Fresh 21,213 - 21,213 -
-------- -------- -------- ----
$363,336 $314,276 $ 49,060 15.6%
======== ======== ======== ====
Company restaurant operating costs
- ----------------------------------
Wendy's $110,372 $102,545 $ 7,827 7.6%
Tim Hortons 3,165 4,082 (917) (22.5)%
Baja Fresh 7,751 - 7,751 -
-------- -------- -------- ----
$121,288 $106,627 $ 14,661 13.7%
======== ======== ======== ====
Operating costs
- ---------------
Wendy's $ 4,269 $ 4,381 ($ 112) (2.6)%
Tim Hortons 26,417 20,775 5,642 27.2%
Baja Fresh - - - -
-------- -------- -------- ----
$ 30,686 $ 25,156 $ 5,530 22.0%
======== ======== ======== ====
WENDY'S
- -------
COST OF SALES AND RESTAURANT OPERATING COSTS
Wendy's cost of sales includes food, paper and labor for company operated
restaurants and the cost of goods sold to franchisees from Wendy's bun baking
facilities. Total Wendy's cost of sales increased $12.8 million, or 5.2%, to
$258.0 million in the quarter. Of this total, Wendy's domestic restaurant cost
of sales increased $10.2 million, or 4.6%, to $230.6 million in the quarter.
Wendy's domestic cost of sales as a percent of Wendy's domestic retail sales
increased .6% in the quarter. Domestic food costs, as a percent of domestic
retail sales, decreased .2% in the quarter, reflecting a decrease in beef (down
7.2%) and chicken costs, and a selling price increase of .5%. Domestic labor
costs, as a percent of sales, increased .9% in the quarter, primarily reflecting
the de-leverage impact of lower average sales and a slight average crew wage
rate increase of 1.8%.
Wendy's company restaurant operating costs include costs necessary to manage and
operate restaurants except cost of sales and depreciation. Total Wendy's company
restaurant operating costs increased $7.8 million, or 7.6%, to $110.4 million in
the quarter. Of this total, domestic Wendy's company restaurant operating costs
increased $6.8 million, or 7.2%, to $101.8 million in the quarter. As a percent
of retail sales, domestic restaurant costs increased .8% in the quarter. In
general, costs as a percentage of retail sales were pressured from lower average
sales because many costs are fixed or semi-fixed. In addition, higher utility
costs reflecting the difficult weather throughout the first quarter of 2003 were
only partially offset by reduced workers compensation expense.
As a percent of retail sales, Canadian Wendy's cost of sales increased .1% in
the quarter reflecting lower average sales. Average wage rates increased .8% in
the quarter. Canadian Wendy's company restaurant operating costs increased $1.0
million in the quarter reflecting the growth of the business. Outside of North
America, the Company only operates two stores.
16
OPERATING COSTS
Wendy's operating costs include rent expense related to properties subleased to
franchisees and costs related to operating and maintaining Wendy's bun making
facilities. Total Wendy's operating costs decreased 2.6% to $4.3 million in the
quarter, reflecting lower percentage rent due to lower average sales.
TIM HORTONS
- -----------
COST OF SALES
Hortons' cost of sales includes food, paper and labor for company operated
restaurants and the cost of goods sold to franchisees from Hortons' distribution
warehouses and coffee roasting facility. Total Hortons cost of sales increased
$15.0 million, or 21.7%, in the quarter. Of this increase, approximately $3
million is attributable to strengthening of the Canadian dollar. The Hortons'
Canadian warehouse cost of sales increased $17.0 million, or 28%, to $78.2
million in the quarter. This increase reflects additional sales to Canadian
franchisees due to a 171 store increase and higher average sales per restaurant.
Warehouse cost of sales, as a percent of warehouse sales, increased to 80.5% in
the first quarter 2003 from 78.4% in 2002. Hortons U.S. cost of sales were $3.4
million in the quarter, down $3.0 million from 2002, reflecting the continuing
strategy to franchise company operated restaurants.
OPERATING COSTS
Hortons' operating costs include rent expense related to properties subleased to
franchisees, cost of equipment sold to Hortons' franchisees as part of the
initiation of the franchise business, costs to operate and maintain the
distribution warehouses and coffee roasting facility, and training and other
costs to ensure successful franchise openings. Total Hortons' operating costs
increased $5.6 million, or 27.2%, to $26.4 million in the quarter. Approximately
$1 million of the increase is attributable to the stronger Canadian dollar.
Canadian Hortons' rent expense increased $2.3 million, or 28.0%, to $10.9
million in the quarter, reflecting the growth in the number of properties leased
and then subleased to Canadian franchisees, as well as higher percentage rent
due to higher sales. Rental income from these subleases is included in franchise
revenues. Additionally, Canadian cost of equipment and other franchise costs
increased $1.6 million to $6.7 million in the quarter and costs of operating and
maintaining Canadian warehouse operations increased $.9 million to $6.4 million
in the quarter.
BAJA FRESH
- ----------
COST OF SALES AND RESTAURANT OPERATING COSTS
Total Baja Fresh company restaurant cost of sales totaled $21.2 million for the
first quarter 2003. Total Baja Fresh company restaurant operating costs totaled
$7.8 million for the quarter.
CONSOLIDATED
- ------------
GENERAL AND ADMINISTRATIVE EXPENSES
Company general and administrative expenses increased $8.5 million, or 15.2%, to
$64.8 million in the quarter. As a percent of revenues, costs were .1% higher in
the quarter at 9.3% versus 9.2% last year. The dollar increase in 2003 includes
incremental expenses for Baja Fresh of $3.1 million and an overall increase in
salaries and benefits and insurance costs. If the incremental expense from Baja
Fresh is excluded because the Company did not acquire Baja Fresh until June 2002
and therefore, no expense was recorded for Baja Fresh in the first quarter of
2002, general and administrative expenses increased 9.7% over last year.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses for the quarter increased over 2002
reflecting the Company's information technology initiatives and additional
restaurant development.
OTHER INCOME
Other income includes expenses (income) that are not directly derived from the
Company's primary businesses. This includes income from the Company's
investments in joint ventures and other minority investments. Expenses include
store closures, other asset write-offs, and reserves for international and legal
issues.
17
Consolidated other income increased $2.6 million over the prior year quarter.
Included in this increase is equity income related to the Company's joint
venture with IAWS Group/Cuisine de France, as well as favorable currency
adjustments associated with the strengthening of the Canadian dollar.
FOREIGN CURRENCY
The primary currency exposure the Company has is to the Canadian dollar. The
results of Wendy's and Hortons' Canadian operations are translated into U.S.
dollars. In addition, various cross border transactions must be "marked to
market" each quarter with the income impact included in "Other Income". The
impact on first quarter 2003 diluted earnings per share was approximately $.015,
including both amounts reflected in Other Income and the favorable impact of
translating Wendy's and Hortons Canadian operations.
COMPREHENSIVE INCOME
--------------------
Comprehensive income increased $29.9 million in the quarter and includes net
income, which increased $.4 million, and translation and other adjustments
caused by changes in foreign currency. The translation and other adjustments in
the current quarter increased $29.5 million versus 2002, reflecting a
strengthening Canadian dollar. During first quarter 2002, the Canadian dollar
was relatively stable (see Note 4 to the Consolidated Condensed Financial
Statements).
FINANCIAL POSITION
------------------
OVERVIEW
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 46% and 32%, respectively, at March 30, 2003.
Standard & Poor's and Moody's rate the Company's senior unsecured debt BBB+ and
Baa-1, respectively. Overall cash was reduced $45 million during the quarter.
Cash generated by operations was offset by capital expenditures. In addition,
the Company used $35.9 million to repurchase common shares and paid $6.9 million
in dividends.
COMPARATIVE CASH FLOW
Cash flow from operations was $63.2 million for the first quarter 2003 and $73.3
million for the prior year. The most significant components of the 2003 decrease
include increased tax payments of $21.5 million, primarily due to improved prior
year operating results, partially offset by higher net income plus depreciation
and amortization of $6.3 million.
Net cash used in investing activities totaled $68.0 million in the first quarter
2003 compared to $78.9 million in 2002. The $10.9 million decrease primarily
relates to a decrease in joint venture and equity investments of $12.2 million.
In 2002, the Company invested $9.0 million for a 45% interest in Cafe Express,
an owner of fast casual restaurants, and invested $7.3 million in a joint
venture with IAWS Group/Cuisine de France. In 2003, the Company invested $4.0
million in this joint venture. Capital expenditures of $68.8 million for the
first quarter of 2003 are comparable to $73.0 million for the first quarter of
2002.
Financing activities used cash of $40.2 million in the first quarter of 2003
compared to a net cash inflow of $26.7 million in 2002. The difference is
primarily due to common shares repurchased in 2003 and reduced proceeds from the
exercise of options in 2003 compared to 2002. Proceeds from the exercise of
stock options were $30.5 million higher in 2002 than 2003. In the first quarter
of 2003, $35.9 million was used to repurchase 1.4 million common shares compared
to no common shares repurchased in the first quarter of 2002. Since 1998 and
through the end of the first quarter of 2003, the Company has repurchased 36.1
million common and exchangeable shares for $863 million. As of March 30, 2003,
$187 million remained under the repurchase authorization as approved by the
Company's Board of Directors.
LIQUIDITY AND CAPITAL RESOURCES
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
in the rating is significant, it is possible that the Company would not be able
to borrow on acceptable terms. Factors that
18
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.
In the first quarter of 2003, the Company took two steps to increase its
financial flexibility to respond to potential opportunities and longer term cash
requirements. These included filing a shelf registration statement on Form S-3
with the Securities and Exchange Commission to issue up to $500 million of
securities and entering into a new $200 million revolving credit facility. The
new $200 million revolving credit facility replaced the six revolving credit
facilities totaling $200 million that were previously in place. The new
revolving credit facility contains various covenants which, among other things,
require the maintenance of certain ratios, including indebtedness to total
capitalization and a fixed charge coverage ratio and limits on the amount of
assets that can be sold and liens that can be placed on the Company's assets. At
March 30, 2003, the Company was in compliance with its covenants under the
revolving credit facility and no amounts under the revolving credit facility
were outstanding.
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 paragraphs.
MANAGEMENT'S OUTLOOK
--------------------
The Company continues to employ its strategic initiatives as outlined in its
10-K/A filed with the Securities and Exchange Commission on April 22, 2003.
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, growing a healthy
restaurant system and partnering finance with operations.
New restaurant development will continue to be very important to the Company.
The Company currently estimates that it will open between 560-605 new Wendy's,
Hortons and Baja Fresh restaurants during 2003 (both company and franchise),
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. This would be a growth rate of approximately 5% to 6%,
including store closures. The new unit openings will be concentrated in North
America, specifically Wendy's U.S., Hortons Canada and Baja Fresh. First quarter
development for 2003 and 2002 is summarized in the chart below:
FIRST FIRST FULL YEAR
QUARTER 2003 QUARTER 2002 2003 OUTLOOK
---------------------------------------------------
Wendy's 33 45 295-315
Hortons 33 26 195-210
Baja Fresh* 17 6 70-80
-- -- -------
Totals 83 77 560-605
== == =======
* Baja Fresh was acquired by the Company on June 19, 2002. Information prior to
that date is included for informational purposes only.
The Company will continue 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. In first
quarter 2003, the Company made an additional investment of $4.0 million in its
joint venture investment between Hortons Canada and IAWS Group/Cuisine de
France. Capital expenditures for 2003 are expected to be in the range of $325
million to $365 million for new restaurant development, remodeling, maintenance
and technology initiatives. The Company also plans to invest $50 million to $60
million on new business opportunities and to expand its Hortons joint venture
facility in Canada.
The Company has set a goal in the range of $2.02 to $2.08 for its 2003 earnings
per share. This would be an increase of 7% to 10% from 2002. The Company's
long-term earnings per share goal continues to be 12% to 15%.
19
MARKET RISK
-----------
The Company's exposure to various market risks remains substantially the same as
reported at December 29, 2002. The Company's disclosures about market risk are
incorporated herein by reference from page 11 of the Company's Form 10-K/A filed
with the Securities and Exchange Commission on April 22, 2003.
The following is a summary of derivative contracts entered into and outstanding
as of March 30, 2003.
FOREIGN EXCHANGE RISK
The Company's exposure to foreign exchange risk is primarily related to
fluctuations in the Canadian dollar relative to the U.S. dollar. The exposure to
Canadian dollar exchange rates on the Company's 2003 cash flows primarily
includes imports paid for by Canadian operations in U.S. dollars and payments
from the Company's Canadian operations to the Company's U.S. operations. In
aggregate, these amounts are anticipated to be in excess of $100 million in
2003.
The Company seeks to manage its cash flow, net income, and balance sheet
exposure to changes in the value of foreign currencies. The Company may use
derivative products to reduce the risk of a significant negative impact on its
U.S. dollar cash flow or income. The Company does not hedge foreign currency
exposure in a manner that would entirely eliminate the effect of changes in
foreign currency exchange rates on net income and cash flow. The Company does
not speculate in foreign currency and does not hedge foreign currency
translation or foreign currency net assets and liabilities.
Forward currency contracts with a notional amount of $15.0 million were
outstanding as of March 30, 2003 to sell Canadian dollars and buy U.S. dollars.
These contracts do not extend beyond June 2003 and are considered to be highly
effective cash flow hedges according to criteria specified in SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". In accordance
with SFAS No. 133, the Company defers unrealized gains and losses arising from
these contracts until the related transactions occur. The fair value loss on the
contracts at March 30, 2003 of $.6 million is included in accumulated other
comprehensive expense and is expected to be reclassified to earnings in 2003 and
offset against the underlying transactions when the transactions occur. Fair
values are determined from quoted market prices.
INTEREST RATE RISK
The Company is exposed to interest rate risk impacting its net borrowing costs.
The Company seeks to manage its exposure to interest rate risk and to lower its
net borrowing costs by managing the mix of fixed and floating rate instruments
based on capital markets and business conditions.
To manage interest rate risk, the Company has entered into an interest rate
swap, effectively converting some of its fixed interest rate debt to variable
interest rates. By entering into the interest rate swap, the Company agreed to
exchange, at specified intervals, the difference between fixed and variable
interest amounts calculated by reference to an agreed-upon notional principle
amount. The Company does not enter into speculative swaps or other financial
contracts.
The interest rate swap outstanding on March 30, 2003 is for the notional amount
of $100.0 million and meets specific conditions of SFAS No. 133 to be considered
a highly effective fair value hedge of a portion of the Company's long term
debt. Accordingly, gains and losses arising from the swap are completely offset
against gains or losses of the underlying debt obligation. The fair value loss
on the interest rate swap was $.5 million at March 30, 2003 based on quoted
market prices. The swap matures in December 2005.
20
SYSTEMWIDE RESTAURANTS BY TYPE
------------------------------
The number of systemwide restaurants open as of March 30, 2003 and March 31,
2002 by type was as follows:
AS OF AS OF INCREASE/(DECREASE)
MARCH 30, 2003 MARCH 31, 2002 FROM PRIOR YEAR
------------------------------------------------------------------------------------------------
Wendy's
- -------
Company 1,334 1,236 98
Franchise 4,928 4,828 100
------------------------------------------------------------------------------------------------
Total Wendy's 6,262 6,064 198
================================================================================================
Tim Hortons
- -----------
Company 69 84 (15)
Franchise 2,304 2,101 203
------------------------------------------------------------------------------------------------
Total Tim Hortons 2,373 2,185 188
================================================================================================
Baja Fresh*
- -----------
Company 102 72 30
Franchise 124 86 38
------------------------------------------------------------------------------------------------
Total Baja Fresh 226 158 68
================================================================================================
Total System 8,861 8,407 454
================================================================================================
* Baja Fresh was acquired by the Company on June 19, 2002. Information prior to
that date is included for informational purposes only.
SYSTEMWIDE RESTAURANTS BY GEOGRAPHIC AREA
-----------------------------------------
The number of systemwide restaurants open as of March 30, 2003 and March 31,
2002 by geographic area was as follows:
AS OF AS OF INCREASE/(DECREASE)
MARCH 30, 2003 MARCH 31, 2002 FROM PRIOR YEAR
------------------------------------------------------------------------------------------------
Wendy's
- -------
Domestic 5,564 5,345 219
Canada 355 339 16
Other International 343 380 (37)
------------------------------------------------------------------------------------------------
Total Wendy's 6,262 6,064 198
================================================================================================
Tim Hortons
- -----------
U.S. 160 143 17
Canada 2,213 2,042 171
------------------------------------------------------------------------------------------------
Total Tim Hortons 2,373 2,185 188
================================================================================================
Baja Fresh*
- ----------
Domestic 226 158 68
================================================================================================
Total System 8,861 8,407 454
================================================================================================
* Baja Fresh was acquired by the Company on June 19, 2002. Information prior to
that date is included for informational purposes only.
21
RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations". This Statement addresses accounting and reporting
standards for legal obligations associated with the retirement of tangible
long-lived assets. The Company adopted this Statement in first quarter 2003 and
its provisions did not have a significant impact on the Company's financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4, 44, and
64, Amendment of SFAS No. 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements". This Statement also rescinds SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers". This Statement amends SFAS
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 SFAS No. 4, are
effective for fiscal years beginning after May 15, 2002. The Company adopted
these provisions in the first quarter 2003. The remaining provisions of this
Statement were adopted by the Company for transactions occurring after May 15,
2002. The adoption of SFAS No. 145 has not resulted in a significant impact to
the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". 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
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 is
effective for exit or disposal activities that are initiated after December 31,
2002. The Company adopted SFAS No. 146 in first quarter 2003. Such adoption did
not result in a significant impact to the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting of Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS No. 123". This
Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. Under the provisions of SFAS No.
148, companies that choose to adopt the accounting provisions of SFAS No. 123
will be permitted to select from three transition methods: Prospective method,
Modified prospective method and Retroactive restatement method. The transition
and annual disclosure provisions of SFAS No. 148 are effective for fiscal years
ending after December 15, 2002. The Company will continue to follow the
disclosure requirements of SFAS No. 123, as amended by SFAS No. 148.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This Statement amends and
clarifies the accounting guidance on derivative instruments (including certain
derivative instruments embedded in other contracts) and hedging activities that
fall within the scope of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". SFAS No. 149 also amends certain other existing
pronouncements, which will result in more consistent reporting of contracts that
are derivatives in their entirety or that contain embedded derivatives that
warrant separate accounting. SFAS No. 149 is effective for contracts entered
into or modified after June 30, 2003, with certain exceptions, and for hedging
relationships initiated after June 30, 2003. The guidance outlined in this
Statement is to be applied prospectively. The Company is in the process of
evaluating the impact of this Statement on its financial statements and will
adopt the provisions in the third quarter of 2003.
FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others - an interpretation of SFAS 5, 57 and 107 and rescission of FIN No. 34"
22
was issued in November 2002. This Interpretation addresses the disclosures to be
made by a guarantor in its interim and annual financial statements about
obligations under guarantees. This Interpretation clarifies that a guarantor is
required to recognize, at the inception of the guarantee, a liability for the
fair value of the obligation undertaken in the issuing of the guarantee. FIN No.
45 does not prescribe a specific approach for subsequently measuring the
guarantor's recognized liability over the term of the related guarantee. This
Interpretation also incorporates, without change, the guidance of FIN No. 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others", which is being
superseded. The recognition provisions of FIN No. 45 are effective for any
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim and annual
periods after December 15, 2002. The Company adopted the disclosure requirements
of FIN 45 in fourth quarter 2002 and the recognition provisions in first quarter
2003. Such adoption did not result in a significant impact to the Company's
financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities - an interpretation of "Accounting Research Bulletin" ("ARB") No. 51".
This Interpretation clarifies the application of the majority voting interest
requirement of ARB No. 51, "Consolidated Financial Statements", to certain types
of variable interest entities that do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The controlling financial interest may be achieved
through arrangements that do not involve voting interests. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies to the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise hold a variable
interest that is acquired before February 1, 2003. The Interpretation applies to
public enterprises as of the beginning of the applicable interim or annual
period, and it applies to nonpublic enterprises as of the end of the applicable
annual period. FIN No. 46 may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
The Company utilizes various advertising funds ("Funds") to administer its
advertising programs. These Funds collect money from franchise and company
operated restaurants to be used for mutually beneficial marketing programs. The
Company is in the process of evaluating the impact of this Interpretation on its
financial statements, including the classification of these Funds under FIN No.
46. The Company adopted the disclosure provisions of this Interpretation in the
fourth quarter of 2002 and will adopt the remaining provisions in the third
quarter of 2003. If it were determined that the consolidation of these Funds
would be required under FIN No. 46, the Company does not expect this to have a
material impact to annual consolidated net income.
In November 2002, the EITF released EITF No. 02-16, "Accounting by a Reseller
for Cash Consideration Received from a Vendor". EITF No. 02-16 provides guidance
on the recognition of cash consideration received by a customer from a vendor.
EITF No. 02-16 is effective for transactions entered into or modified after
December 31, 2002. The Company adopted the provisions of EITF No. 02-16 in first
quarter 2003. Such adoption did not result in a significant impact to the
Company's financial statements.
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.
23
Item 3. Quantitative and Qualitative Disclosures About Market Risk
This information is incorporated by reference from the section titled "Market
Risk" on page 20 of this Form 10-Q.
Item 4. Controls and Procedures
(a) Within the 90-day period prior to the filing date of this Quarterly Report
on Form 10-Q, 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 Company's
disclosure controls and procedures, as contemplated by Securities Exchange
Act Rule 13a-15. Based on that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that such disclosure
controls and procedures were effective.
(b) No significant changes were made in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to
the date of the evaluation performed pursuant to Securities Exchange Act
Rule 13a-15 referred to above.
24
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Index to Exhibits on Page 29.
(b) The Company filed three reports on Form 8-K for the quarter ended March 30,
2003. The first report on Form 8-K was filed January 9, 2003 as the Company
issued a press release announcing sales results for 2002, the fourth
quarter and December 2002. A copy of the press release was attached to the
filing.
The second report on Form 8-K was filed January 31, 2003 as the Company
issued a press release announcing its fourth quarter and full year 2002
results. A copy of the press release was attached to the filing.
The third report on Form 8-K was filed February 3, 2003 as the Company
issued a press release announcing its financial goals for 2003. A copy of
the press release was attached to the filing.
25
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: MAY 13, 2003 /s/ Kerrii B. Anderson
------------- -----------------------------
Kerrii B. Anderson
Executive Vice President and
Chief Financial Officer
26
CERTIFICATIONS
I, John T. Schuessler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Wendy's
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ John T. Schuessler
----------------------------------------
Name: John T. Schuessler
Title: Chief Executive Officer
27
CERTIFICATIONS
I, Kerrii B. Anderson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Wendy's
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ Kerrii B. Anderson
----------------------------------------
Name: Kerrii B. Anderson
Title: Chief Financial Officer
28
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit
Number Description Page No.
------ ----------- --------
99(a) Safe Harbor Under 30 - 31
the Private Securities
Litigation Reform Act of 1995
99(b) Certification of 32
Chief Executive Officer
99(c) Certification of 33
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.
29