WENDY’S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
| | | | | | | |
| | | Quarter Ended | |
| | | September 28, 2008 | | | September 30, 2007 | |
| | | (In thousands, except per share data) | |
| | | (Unaudited) | |
| Revenues | | | | | | |
| Sales | | $ | 548,111 | | | $ | 554,808 | |
| Franchise revenues | | | 76,775 | | | | 74,976 | |
| | | | 624,886 | | | | 629,784 | |
| Costs and expenses | | | | | | | | |
| Cost of sales | | | 455,653 | | | | 445,761 | |
| Advertising | | | 26,469 | | | | 26,204 | |
| Depreciation of property and equipment | | | 32,527 | | | | 28,272 | |
| General and administrative expenses | | | 63,542 | | | | 65,838 | |
| Facilities relocation and corporate restructuring | | | 829 | | | | 2,425 | |
| Special Committee and other merger related charges | | | 69,009 | | | | 13,437 | |
| Joint venture income | | | (3,228 | ) | | | (3,123 | ) |
| Total costs and expenses | | | 644,801 | | | | 578,814 | |
| Operating (loss) income | | | (19,915 | ) | | | 50,970 | |
| Interest expense, net | | | (7,308 | ) | | | (7,388 | ) |
| Other (expense) income, net | | | (3,552 | ) | | | 54 | |
| (Loss) income from continuing operations before income taxes | | | (30,775 | ) | | | 43,636 | |
| Benefit from (provision for) income taxes | | | 925 | | | | (14,840 | ) |
| (Loss) income from continuing operations | | | (29,850 | ) | | | 28,796 | |
| Income from discontinued operations, net of income taxes | | | - | | | | 1,114 | |
| Net (loss) income | | $ | (29,850 | ) | | $ | 29,910 | |
| Basic and diluted (loss) income per share: | | | | | | | | |
| Continuing operations | | $ | (0.34 | ) | | $ | 0.33 | |
| Discontinued operations | | | - | | | | 0.01 | |
| Net (loss) income | | $ | (0.34 | ) | | $ | 0.34 | |
| | | | | | | | | |
| Dividends declared and paid per common share | | $ | - | | | $ | 0.125 | |
The accompanying Notes are an integral part of the unaudited Consolidated Condensed Financial Statements.
WENDY’S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
| | | Year-to-Date Ended | |
| | | September 28, 2008 | | | September 30, 2007 | |
| | | (In thousands, except per share data) | |
| | | (Unaudited) | |
| Revenues | | | | | | |
| Sales | | $ | 1,617,213 | | | $ | 1,636,064 | |
| Franchise revenues | | | 222,740 | | | | 216,169 | |
| | | | 1,839,953 | | | | 1,852,233 | |
| Costs and expenses | | | | | | | | |
| Cost of sales | | | 1,351,451 | | | | 1,335,672 | |
| Advertising | | | 80,116 | | | | 81,599 | |
| Depreciation of property and equipment | | | 96,369 | | | | 88,459 | |
| General and administrative expenses | | | 201,270 | | | | 192,371 | |
| Facilities relocation and corporate restructuring | | | 2,523 | | | | 9,353 | |
| Special Committee and other merger related charges | | | 84,231 | | | | 18,145 | |
| Joint venture income | | | (9,186 | ) | | | (8,198 | ) |
| Total costs and expenses | | | 1,806,774 | | | | 1,717,401 | |
| Operating income | | | 33,179 | | | | 134,832 | |
| Interest expense, net | | | (21,789 | ) | | | (23,366 | ) |
| Other (expense) income, net | | | (3,822 | ) | | | 518 | |
| Income from continuing operations before income taxes | | | 7,568 | | | | 111,984 | |
| Provision for income taxes | | | (13,359 | ) | | | (39,425 | ) |
| (Loss) income from continuing operations | | | (5,791 | ) | | | 72,559 | |
| Income from discontinued operations, net of income taxes | | | - | | | | 1,271 | |
| Net (loss) income | | $ | (5,791 | ) | | $ | 73,830 | |
| Basic (loss) income per share: | | | | | | | | |
| Continuing operations | | $ | (0.07 | ) | | $ | 0.81 | |
| Discontinued operations | | | - | | | | 0.01 | |
| Net (loss) income | | $ | (0.07 | ) | | $ | 0.82 | |
| Diluted (loss) income per share: | | | | | | | | |
| Continuing operations | | $ | (0.07 | ) | | $ | 0.80 | |
| Discontinued operations | | | - | | | | 0.01 | |
| Net (loss) income | | $ | (0.07 | ) | | $ | 0.81 | |
| | | | | | | | | |
| Dividends declared and paid per common share | | $ | - | | | $ | 0.335 | |
The accompanying Notes are an integral part of the unaudited Consolidated Condensed Financial Statements.
WENDY’S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
| | | | | | | |
| | | September 28, 2008 | | | December 30, 3007(A) | |
| | | (Unaudited) | | | | |
| | | (In thousands) | |
| ASSETS | | | | | | |
| Current assets | | | | | | |
| Cash and cash equivalents | | $ | 199,785 | | | $ | 211,200 | |
| Accounts receivable, net | | | 74,241 | | | | 72,503 | |
| Deferred income taxes | | | 6,000 | | | | 7,304 | |
| Inventories | | | 13,200 | | | | 12,550 | |
| Advertising fund restricted assets | | | 66,113 | | | | 42,665 | |
| Prepaid expenses and other current assets | | | 16,924 | | | | 19,944 | |
| Restricted cash equivalents | | | 28,265 | | | | - | |
| Total current assets | | | 404,528 | | | | 366,166 | |
| Restricted cash equivalents | | | 8,955 | | | | - | |
| Investments | | | 51,593 | | | | 60,384 | |
| Property and equipment, net | | | 1,207,093 | | | | 1,222,595 | |
| Goodwill | | | 83,794 | | | | 84,001 | |
| Deferred income taxes, benefit | | | 5,237 | | | | 4,899 | |
| Other intangible assets, net | | | 25,650 | | | | 26,994 | |
| Other assets | | | 24,375 | | | | 24,358 | |
| Total assets | | $ | 1,811,225 | | | $ | 1,789,397 | |
(A) Derived from the audited consolidated financial statements at December 30, 2007.
The accompanying Notes are an integral part of the Consolidated Condensed Financial Statements.
WENDY’S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
| | | | | | | |
| | | September 28, 2008 | | | December 30, 2007(A) | |
| | | (Unaudited) | | | | |
| | | (In thousands) | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | |
| Current liabilities | | | | | | |
| Accounts payable | | $ | 74,028 | | | $ | 85,662 | |
| Accrued expenses | | | 201,876 | | | | 170,456 | |
| Advertising fund restricted liabilities | | | 66,113 | | | | 35,760 | |
| Current portion of long-term obligations | | | 2,193 | | | | 26,591 | |
| Total current liabilities | | | 344,210 | | | | 318,469 | |
| Long-term debt | | | 545,006 | | | | 543,023 | |
| Deferred income taxes | | | 39,456 | | | | 45,351 | |
| Deferred income | | | 16,157 | | | | 9,462 | |
| Other long-term liabilities | | | 69,808 | | | | 68,961 | |
| Commitments and contingencies | | | | | | | | |
| Shareholders’ equity | | | | | | | | |
| Preferred stock, Authorized: 250 shares | | | | | | | | |
Common stock, $.10 stated value per share, Authorized: 200,000 shares, Issued: 131,020 and 130,241 shares, respectively | | | 13,102 | | | | 13,024 | |
| Capital in excess of stated value | | | 1,150,334 | | | | 1,110,363 | |
| Retained earnings | | | 1,249,060 | | | | 1,287,963 | |
| Accumulated other comprehensive income (loss): | | | | | | | | |
| Cumulative translation adjustments | | | 22,768 | | | | 28,949 | |
| Pension liability | | | (21,498 | ) | | | (18,990 | ) |
| | | | 2,413,766 | | | | 2,421,309 | |
| Treasury stock at cost: 42,844 shares | | | (1,617,178 | ) | | | (1,617,178 | ) |
| Total shareholders’ equity | | | 796,588 | | | | 804,131 | |
| Total liabilities and shareholders’ equity | | $ | 1,811,225 | | | $ | 1,789,397 | |
(A) Derived from the audited consolidated financial statements at December 30, 2007.
The accompanying Notes are an integral part of the Consolidated Condensed Financial Statements.
WENDY’S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
| | | | | | | |
| | | Year-to-Date Ended | |
| | | September 28, 2008 | | | | |
| | | (In thousands) | |
| | | (Unaudited) | |
| Net cash provided by operating activities from continuing operations | | $ | 146,048 | | | $ | 212,317 | |
| Net cash used in operating activities from discontinued operations | | | - | | | | (1,710 | ) |
| Net cash provided by operating activities | | | 146,048 | | | | 210,607 | |
| Cash flows from investing activities | | | | | | | | |
| Proceeds from property dispositions | | | 8,625 | | | | 20,254 | |
| Proceeds from insurance settlements | | | 2,995 | | | | 8,389 | |
| Capital expenditures | | | (87,731 | ) | | | (88,749 | ) |
| Funding of merger-related liabilities into restricted cash equivalents | | | (37,220 | ) | | | - | |
| Acquisitions of franchisees | | | (2,553 | ) | | | (2,506 | ) |
| Other | | | 308 | | | | (297 | ) |
| Net cash used in investing activities from continuing operations | | | (115,576 | ) | | | (62,909 | ) |
| Net cash used in investing activities from discontinued operations | | | - | | | | (174 | ) |
| Net cash used in investing activities | | | (115,576 | ) | | | (63,083 | ) |
| Cash flows from financing activities | | | | | | | | |
| Excess stock-based compensation tax benefits | | | 4,057 | | | | 5,062 | |
| Proceeds from employee stock options exercised | | | 7,551 | | | | 6,418 | |
| Repurchase of common stock | | | - | | | | (298,032 | ) |
| Principal payments on debt obligations | | | (19,425 | ) | | | (54,701 | ) |
| Dividends paid on common shares | | | (32,892 | ) | | | (29,962 | ) |
| Net cash used in financing activities | | | (40,709 | ) | | | (371,215 | ) |
| Effect of exchange rate changes on cash from continuing operations | | | (1,178 | ) | | | 3,979 | |
| Net decrease in cash and cash equivalents | | | (11,415 | ) | | | (219,712 | ) |
| Cash and cash equivalents at beginning of period | | | 211,200 | | | | 457,614 | |
| Add: Cash and cash equivalents of discontinued operations at beginning of period | | | - | | | | 2,273 | |
| Less: Cash and cash equivalents of discontinued operations at end of period | | | - | | | | - | |
| Cash and cash equivalents at end of period | | $ | 199,785 | | | $ | 240,175 | |
| Supplemental disclosures: | | | | | | | | |
| Interest paid in continuing operations | | $ | 18,060 | | | $ | 21,713 | |
| Income taxes paid (refunded), net | | | 4,069 | | | | (4,157 | ) |
| Capitalized lease obligations incurred in continuing operations | | | 5,321 | | | | 543 | |
The accompanying Notes are an integral part of the Consolidated Condensed Financial Statements.
WENDY’S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)
The following review of the results of operations of Wendy's Interational, Inc. and its Subsidiaries is presented for informational purposes only. You should read the following discussion in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this informational disclosure.
NOTE 1 BASIS OF PRESENTATION
On September 29, 2008, Triarc Companies Inc. (“Triarc”) and Wendy’s International, Inc. (the “Company”) completed their merger transaction (see Note 18). In conjunction with the merger, Triarc changed its corporate name to Wendy’s/Arby’s Group, Inc. (“Wendy’s/Arby’s”). The accompanying financial statements are presented using the Company’s historical basis of accounting as described below and these statements do not include any adjustments which will result from Wendy’s/Arby’s application of purchase accounting.
The accompanying Consolidated Condensed Financial Statements have been prepared in accordance with the rules of the U.S. Securities and Exchange Commission applicable to interim financial statements. Such statements contain all adjustments (all of which are normal and recurring in nature) necessary for a fair statement of the consolidated condensed financial position of Wendy’s International, Inc. and subsidiaries as of September 28, 2008 and December 30, 2007, and the consolidated condensed results of operations and comprehensive income (see Note 7) for the quarters and year-to-date periods ended September 28, 2008 and September 30, 2007 and consolidated condensed cash flows for the year-to-date periods ended September 28, 2008 and September 30, 2007.
The accompanying Company’s financial statements have been reclassified to conform to Wendy’s/Arby’s presentation and generally include items which facilitate the comparison of statement of operations data, such as restaurant margins between Wendy’s and Wendy’s/Arby’s. Specifically, the Company restaurant operating costs and operating cost captions in Wendy’s historical financial statement of operations have been reclassified to cost of sales, advertising and general administrative expenses in the accompanying unaudited consolidated condensed statement of operations. Cost of sales and advertising as reclassified represents “four wall” costs of the Company-owned restaurants which is considered an important measure of its Company-owned operations. There are other not material reclassifications between financial statement captions to conform to the Wendy’s/Arby’s presentation. All of these financial statements are unaudited.
On July 29, 2007, the Company completed the sale of Cafe Express and, accordingly, its results of operations are reflected as discontinued operations for the quarter and year-to-date periods ended September 30, 2007 (see Note 6).
NOTE 2 NET INCOME (LOSS) PER SHARE
Basic earnings per common share are computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Diluted computations are based on the treasury stock method and include assumed conversions of stock options and restricted stock and restricted stock units, when outstanding and dilutive. Diluted loss per share from continuing operations for the three and nine month periods ended September 30, 2008 is the same as basic loss per share since the effect of all potentially dilutive securities on the loss from continuing operations would have been antidilutive.
The computation of diluted earnings per common share excludes options to purchase 3,221 and 855 shares for the third quarters of 2008 and 2007, respectively, and 2,422 and 285 shares for the year-to-date periods ended September 28, 2008 and September 30, 2007, respectively, because the exercise price of these options was greater than the average market price of the common shares, and therefore, they were antidilutive.
The computations of basic and diluted earnings per common share are shown below:
| | | Quarter Ended | | | Year-to-Date Ended | |
| (In thousands, except per share data) | | September 28, 2008 | | | September 30, 2007 | | | September 28, 2008 | | | September 30, 2007 | |
| (Loss) income from continuing operations for computation of basic and diluted earnings per common share | | $ | (29,850 | ) | | $ | 28,796 | | | $ | (5,791 | ) | | $ | 72,559 | |
| Income from discontinued operations for computation of basic and diluted earnings per common share | | | - | | | | 1,114 | | | | - | | | | 1,271 | |
| Net (loss) income for computation of basic earnings per common share | | $ | (29,850 | ) | | $ | 29,910 | | | $ | (5,791 | ) | | $ | 73,830 | |
| Weighted average shares for computation of diluted earnings per common share | | | 88,135 | | | | 87,362 | | | | 87,769 | | | | 89,728 | |
| Effect of dilutive stock options and restricted shares | | | - | | | | 1,045 | | | | - | | | | 1,081 | |
| Weighted average shares for computation of diluted earnings per common share | | | 88,135 | | | | 88,407 | | | | 87,769 | | | | 90,809 | |
| Basic (loss) income per share: | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | (0.34 | ) | | $ | 0.33 | | | $ | (0.07 | ) | | $ | 0.81 | |
| Discontinued operations | | | - | | | | 0.01 | | | | - | | | | 0.01 | |
| Net (loss) income | | $ | (0.34 | ) | | $ | 0.34 | | | $ | (0.07 | ) | | $ | 0.82 | |
| Diluted (loss) income per share: | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | (0.34 | ) | | $ | 0.33 | | | $ | (0.07 | ) | | $ | 0.80 | |
| Discontinued operations | | | - | | | | 0.01 | | | | - | | | | 0.01 | |
| Net (loss) income | | $ | (0.34 | ) | | $ | 0.34 | | | $ | (0.07 | ) | | $ | 0.81 | |
NOTE 3 STOCK-BASED COMPENSATION
The Company recognized stock compensation expense included in continuing operations of $3,513 and $10,574 for the three and nine month periods, respectively, ended September 28, 2008 and $2,097 and $8,712 for the three and nine month periods, respectively, ended September 30, 2007. Stock compensation expense included in discontinued operations was $63 and $254 for the three and nine month periods ended September 30, 2007 (none for any of the 2008 periods).
In May 2008, the Company granted 2,433 stock options to key employees at a price of $28.71. In August 2008, the Company granted 59 stock options to key employees at a price of $23.37. Except for accelerated vesting related to a portion of each of these option grants as described below, one-third of the options vest on each of the first three anniversaries of the grant date.
In calculating the fair value of options issued to employees that received grants in May and August 2008, the Company used the following assumptions:
| | May | August |
| Assumption | | |
| Dividend yield | 1.7% | 2.1% |
| Expected volatility | 26% | 26% |
| Risk-free interest rate | 2.6% | 3.2% |
| Expected lives | 4.3 years | 4.3 years |
| Per share weighted average fair value of options granted | $6.05 | $4.88 |
Upon the completion of the merger with Triarc on September 29, 2008 (see Note 18) and in accordance with the terms of the Company’s incentive plans, the following occurred:
| · | All previously unvested restricted stock became fully vested. The Company recorded compensation expense of $7,900 during the three month period ended September 28. 2008 for such accelerated vesting which has been included in Special Committee and other merger related charges in the accompanying consolidated condensed statement of operations. |
| · | All previously unvested performance units vested at the highest level of performance (150%). The performance units were settled for $6,150 in cash during October 2008 based on the fair market value of Wendy’s common shares at the time of the merger. The Company recorded compensation expense (included in the Special Committee and other merger related charges) of $11,408 during the three month period ended September 28, 2008 for such performance units. The related settlement liability as of September 28, 2008 is included in Accrued expenses on the Consolidated Condensed Balance Sheet. |
| · | A substantial portion of outstanding options to purchase Wendy’s common stock which had been granted to employees and non-employee directors also vested. The Company recognized $7,592 in additional compensation expense during the three month period ended September 28, 2008 for such accelerated vesting which has been included in Special Committee and other merger related charges in the accompanying consolidated condensed statement of operations. |
The following table presents the stock option activity, including the effect of the merger with Triarc, during fiscal 2008:
| Options to purchase common stock of Wendy’s: | | | |
| Outstanding at December 30, 2007 | | | 2,112 | |
| Option grants during 2008 | | | 2,509 | |
| Options exercised or cancelled during 2008 | | | (776 | ) |
| Options outstanding as of September 28, 2008 | | | 3,845 | |
| Options exchanged for Wendy’s/Arby’s options: | | | | |
| Fully vested (Note 18) | | | 2,290 | |
| Not fully vested | | | 1,555 | |
| | | | 3,845 | |
NOTE 4 JOINT VENTURE INCOME
Joint venture income included in the unaudited Consolidated Condensed Statements of Operations represents the Company’s share of a 50/50 Canadian restaurant real estate joint venture between Wendy’s and Tim Hortons. Summarized financial information for the joint venture is shown below, of which the Company’s share is 50%.
| (In thousands) | | Quarter Ended | | | Year-to-Date Ended | |
| | September 28, 2008 | | | September 30, 2007 | | | September 28, 2008 | | | September 30, 2007 | |
| Sales | | $ | 9,590 | | | $ | 9,106 | | | $ | 27,613 | | | $ | 24,623 | |
| Gross profit | | | 6,633 | | | | 6,214 | | | | 18,760 | | | | 16,398 | |
| Net income | | | 6,456 | | | | 6,246 | | | | 18,372 | | | | 16,396 | |
NOTE 5 INCOME TAXES
The Company had a benefit from income taxes of ($925), for the three months ended September 28, 2008 and tax provision of $13,359 on the income for nine months ended September 28, 2008. The effective tax rate provision on the income from continuing operations before income taxes for the three months ended September 30, 2007 was 34% and our effective tax rate provision on the income from continuing operations for the nine months ended September 30, 2007 was 35%. The 2008 taxes vary from taxes computed at the U.S. federal statutory rate of 35% primarily due to the determination in the third quarter of 2008 that fees paid to certain advisors to the Special Committee of the Board of Directors that are directly associated with the completed merger transaction with Triarc will not be deductible for income tax purposes. Prior to approval of the merger by shareholders, such fees were assumed to be deductible. The Company has incurred approximately $27,200 in non-deductible fees through September 28, 2008, resulting in approximately $10,300 of additional income tax expense in the quarter and year to date periods ended September 28, 2008.
The Company adopted the provisions of FASB Interpretation No. 48 “Accounting for Uncertainties in Income Taxes” (“FIN 48”) on January 1, 2007. At December 30, 2007, the amount of unrecognized tax benefits was $16,964. The Company recognizes interest related to unrecognized tax benefits in Interest expense, net and penalties in General and administrative expenses. At December 30, 2007, the amount of accrued interest and penalties was $2,336 and $247, respectively. There were no significant changes to unrecognized tax benefit, interest or penalties during the three months and nine months periods ended September 28, 2008. The Company does not anticipate a significant change in unrecognized tax positions during the next year.
NOTE 6 DISCONTINUED OPERATIONS
On July 29, 2007, the Company completed the sale of Cafe Express. Accordingly, the results of operations of Cafe Express are reflected as discontinued operations for the quarter and year-to-date periods ended September 30, 2007. According to the terms of the sale agreement, the disposition of Cafe Express was subject to certain working capital and other adjustments which have not been finalized. The impact of the finalization of the adjustments is not expected to have a material impact on the results of operations of the Company.
The following table presents the significant components of Cafe Express operating results included in Income from discontinued operations for the quarter and year-to-date periods ended September 30, 2007.
| (In thousands) | | Quarter Ended September 30, 2007 | | | Year-to-Date Ended September 30, 2007 | |
| Revenues | | $ | 2,502 | | | $ | 19,687 | |
| Loss before income taxes | | | (632 | ) | | | (379 | ) |
| Income tax benefit | | | 1,746 | | | | 1,650 | |
| Income from discontinued operations, net of tax | | $ | 1,114 | | | $ | 1,271 | |
NOTE 7 CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
The components of other comprehensive (loss) income and total comprehensive (loss) income are shown below:
| | | Quarter Ended | | | Year-to-Date Ended | |
| (In thousands) | | September 28, 2008 | | | September 30, 2007 | | | September 28, 2008 | | | September 30, 2007 | |
| Net (loss) income | | $ | (29,850 | ) | | $ | 29,910 | | | $ | (5,791 | ) | | $ | 73,830 | |
| Other comprehensive income: | | | | | | | | | | | | | | | | |
| Translation adjustments | | | (2,663 | ) | | | 8,799 | | | | (6,181 | ) | | | 18,472 | |
| Pension liability (net of tax (benefit) expense of ($2,670) and $697 for the quarters ended September 28, 2008 and September 30, 2007, respectively, and ($1,578) and $3,367 for the year-to-date periods ended September 28, 2008 and September 30, 2007, respectively) | | | (4,305 | ) | | | 1,054 | | | | (2,508 | ) | | | 5,449 | |
| Total other comprehensive (loss) income | | | (6,968 | ) | | | 9,853 | | | | (8,689 | ) | | | 23,921 | |
| Total comprehensive (loss) income | | $ | (36,818 | ) | | $ | 39,763 | | | $ | (14,480 | ) | | $ | 97,751 | |
Other comprehensive (loss) income is comprised of translation adjustments related to fluctuations in the Canadian dollar and changes in the Company’s pension liability. There was a weakening in the Canadian dollar during the third quarter and year-to-date periods of 2008, versus a strengthening in the Canadian dollar during the third quarter and year-to-date periods of 2007. At the end of the third quarter 2008, the exchange rate of the Canadian dollar for one U.S. dollar was $1.03 versus $1.01 at June 29, 2008 and $0.98 at December 30, 2007. At the end of the third quarter of 2007, the exchange rate of the Canadian dollar to one U.S. dollar was $0.99 versus $1.07 at July 1, 2007 and $1.17 at December 31, 2006.
NOTE 8 DEBT
On February 29, 2008, the Company negotiated a renewal of a $200,000 revolving credit facility that expired on September 1, 2008. There were no borrowings under this revolver during 2008. The Company is currently negotiating the terms of a new $200,000 secured revolving credit facility. The Company currently anticipates finalizing this revolving credit facility in the fourth quarter of 2008. However, there can be no assurance that we will finalize this new revolving credit facility.
In the fourth quarter of 2006, the Company entered into an agreement to sell approximately 40% of the Company’s U.S. royalty stream for a 14-month period to a third party in return for cash proceeds in 2006 of $94,000. The proceeds received in 2006 were classified as debt and were fully repaid by the second quarter of 2008.
The Company’s Senior Notes and the debentures contain various covenants which limit the total of the amount of liens that can be placed on the Company’s assets plus the amount of sale and leaseback transactions. The Company was in compliance with these covenants as of September 28, 2008.
NOTE 9 GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the year-to-date period ended September 28, 2008 are as follows:
| | | | |
| (In thousands) | | Total | |
| Balance at December 30, 2007 | | $ | 84,001 | |
| Goodwill recorded in connection with an acquisition (see Note 10) | | | 825 | |
| Goodwill related to dispositions and write-offs | | | (384 | ) |
| Translation adjustments and other | | | (648 | ) |
| Balance at September 28, 2008 | | $ | 83,794 | |
| | | | | |
The table below presents amortizable intangible assets as of September 28, 2008 and December 30, 2007:
| | | September 28, 2008 | | | December 30, 2007 | |
| (In thousands) | | Cost | | | Accumulated Amortization | | | Net | | | Cost | | | Accumulated Amortization | | | Net | |
| Amortizable intangible assets: | | | | | | | | | | | | | | | | | | |
| Patents and trademarks | | $ | 452 | | | $ | (452 | ) | | $ | - | | | $ | 452 | | | $ | (452 | ) | | $ | - | |
| Other | | | 5,450 | | | | (2,559 | ) | | | 2,891 | | | | 4,985 | | | | (2,281 | ) | | | 2,704 | |
| Computer Software | | | 76,761 | | | | (54,002 | ) | | | 22,759 | | | | 72,668 | | | | (48,378 | ) | | | 24,290 | |
| | | $ | 82,663 | | | $ | (57,013 | ) | | $ | 25,650 | | | $ | 78,105 | | | $ | (51,111 | ) | | $ | 26,994 | |
Included in the net carrying amount in Other above is approximately $2,323 and $2,644 as of September 28, 2008 and December 30, 2007, respectively, net of accumulated amortization of approximately $2,483 and $2,162, respectively, related to the use of the name and likeness of Dave Thomas, the late founder of Wendy’s.
Total intangibles amortization expense was approximately $87 and $280 for the quarter and year-to-date periods ended September 28, 2008, respectively, and approximately $126 and $704 for the quarter and year-to-date periods ended September 30, 2007, respectively. The estimated annual intangibles amortization expense for each of the years 2009 through 2013 is approximately $400.
NOTE 10 ACQUISITIONS
During the nine months ended September 28, 2008, the Company acquired three restaurants from a franchisee for approximately $2,553, including approximately $825 of goodwill. During the nine months ended September 30, 2007, the Company acquired two restaurants from a franchisee for approximately $1,438. No goodwill was acquired in connection with the 2007 acquisitions.
NOTE 11 ASSET HELD FOR DISPOSITION AND IMPAIRMENTS
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company has classified assets with a net book value $2,385 and $3,338 as Assets held for disposition in the Consolidated Condensed Balance Sheets as of September 28, 2008 and December 30, 2007, respectively. Assets classified as held for disposition are no longer depreciated and are classified as held for disposition based on the Company’s intention to sell these assets within 12 months.
The following is a rollforward of assets held for disposition:
| | | | | | | | |
(In thousands, except number of sites) | | | | | |
| Balance at December 30, 2007 | 7 | | $ | 3,338 | | | |
| Sold | (5) | | | (3,642) | | $$ | 754 |
| Transferred to property and equipment | (3) | | | (1,619) | | | |
| Transferred from property and equipment | 8 | | | 4,532 | | | |
| Impairments recorded | | | | (224) | | | |
| Balance at September 28, 2008 | 7 | | $ | 2,385 | | | |
| | | | | | | | |
At September 28, 2008, the net book value of Assets held for disposition included $1,023 of land, $1,059 of buildings and leasehold improvements and $303 of equipment.
The 2008 net gain above of $754 is included in depreciation and amortization in the unaudited Consolidated Condensed Statements of Operations. During the nine months ended September 30, 2007, the Company sold 19 sites which were classified as held for disposition at December 31, 2006, with a net book value of $7,741, for a net gain of $2,796 which is included in depreciation and amortization.
Three sites which were previously classified as held for disposition were reclassified to Property and equipment, net, in 2008 because the sites are no longer being actively marketed for sale. The effect on the Consolidated Statements of Operations related to the reclassification of these sites from Assets held for disposition was limited to depreciation expense and was not material.
During the nine months ended September 28, 2008, the Company sold 19 sites not classified as held for disposition with a net book value of approximately $3,296 for a net gain of $965 which is included in depreciation and amortization in the unaudited Consolidated Condensed Statements of Operations. During the nine months ended September 30, 2007, the Company sold 26 sites not classified as held for disposition with a net book value of approximately $5,453 for a net gain of $4,204 which is included in depreciation and amortization.
During the third quarter and year-to-date periods ended September 28, 2008 the Company recorded approximately $1,051 and $4,229 of asset impairments and write-offs in depreciation and amortization, respectively, related to store closures, compared to store closure charges of $1,409 and $5,723 for the third quarter and year-to-date periods ended September 30, 2007, respectively. Store closure costs are included in depreciation and amortization in the unaudited Consolidated Condensed Statements of Operations.
NOTE 12 FACILITIES RELOCATION AND CORPORATE RESTRUCTURING
The table below presents a reconciliation of the beginning and ending restructuring liabilities which are included in Accrued expenses at December 30, 2007 and September 28, 2008, respectively, in the Consolidated Condensed Balance Sheets related to the Company’s cost reduction plan initiated in 2006.
| | | | | | | | | | |
| | | Reductions in Force | | | Professional Fees | | | Total | |
| Balance at December 30, 2007 | | $ | 701 | | | $ | 10 | | | $ | 711 | |
| Expensed during the period | | | 212 | | | | - | | | | 212 | |
| Paid during the period | | | (917 | ) | | | - | | | | (917 | ) |
| Adjustments | | | 4 | | | | (10 | ) | | | (6 | ) |
| Balance at September 28, 2008 | | $ | - | | | $ | - | | | $ | - | |
In the year-to-date periods ended September 28, 2008 and September 30, 2007, respectively, the Company recognized severance and related benefit costs. As of December 30, 2007, all amounts associated with the cost reduction plan were classified as current liabilities. The Company paid all remaining restructuring liabilities in the first half of 2008.
In addition to the restructuring costs, the Company recognized pretax pension settlement charges of approximately $829 and $1,033 in the third quarters ended September 28, 2008 and September 30, 2007, respectively, and $2,316 and $6,399, for the year-to-date periods ended September 28, 2008 and September 30, 2007, respectively, related to the cost reduction plan. In the third quarter and year-to-date periods ended September 30, 2007, the Company also accrued severance and related benefits costs of approximately $1,432 and $2,509, respectively, and for the year-to-date 2007 accrued professional fees of approximately $573, primarily related to relocation costs and outplacement services related to the cost reduction plan.
NOTE 13 SPECIAL COMMITTEE AND OTHER MERGER RELATED CHARGES
In the third quarter and year-to-date 2008, the Company recognized $67,666 and $82,888, respectively, of Special Committee and other merger related charges, compared to $13,437 and $18,145 for the quarter and year-to-date periods of 2007, respectively. These costs include financial, legal advisory and due diligence fees related to the activities of the Special Committee formed by the Company’s Board of Directors, as well as amounts related to the merger with Triarc, such as key executive payments and equity compensation (see Notes 3 and 18), as follows:
| | | Nine months ended | |
| | | September 28, 2008 | | | September 30, 2007 | |
| Key executive payments | | $ | 26,361 | | | $ | - | |
| Stock compensation (Note 3) | | | 26,900 | | | | - | |
| Financial advisory fees | | | 16,647 | | | | 13,250 | |
| Legal fees | | | 6,841 | | | | 2,549 | |
| Retention bonuses | | | 3,729 | | | | 27 | |
| Other | | | 3,753 | | | | 2,319 | |
| | | $ | 84,231 | | | $ | 18,145 | |
In accordance with the merger agreement, amounts due under the key executive agreements, deferred compensation plan and supplemental executive retirement plans (the "SERPs") were funded into a rabbi trust and are included in the Restricted cash equivalents caption in the Unaudited Consolidated Condensed Balance Sheets. It is expected that the key executive payments and deferred compensation plan distributions of approximately $28,265 will be completed within the next three quarters while aggregate payments of approximately $8,955 under the SERPs generally will be paid within five years after participants terminate employment with the Company.
As of September 28, 2008 and December 30, 2007, there are unpaid expenses related to Special Committee activities of approximately $55,920 and $15,559, respectively, which are included in Accrued expenses in the Consolidated Condensed Balance Sheets. The Special Committee was formed in April 2007 to investigate strategic options including, among other things, revisions to the Company’s strategic plan, changes to its capital structure, or a possible sale, merger or other business combination. Its operations ceased as a result of the completed of the merger with Triarc.
NOTE 14 GUARANTEES AND INDEMNIFICATIONS
The Company has guaranteed certain lease and debt payments, primarily related to franchisees, amounting to approximately $157,655 at September 28, 2008. In the event of default by a franchise owner, the Company generally retains the right to acquire possession of the related restaurants. The Company is contingently liable for certain leases amounting to approximately $16,192 at September 28, 2008. These leases expire on various dates through 2022. The Company is also the guarantor on approximately $2,550 in letters of credit at September 28, 2008 with various parties; however, management does not expect any material loss to result from these instruments because it does not believe performance will be required. The length of the lease, loan and other arrangements guaranteed by the Company or for which the Company is contingently liable varies, but generally does not exceed 20 years.
In addition to the guarantees described above, the Company is party to many agreements executed in the ordinary course of business that provide for indemnification of third parties under specified circumstances, such as lessors of real property leased by the Company, distributors, service providers for various types of services (including commercial banking, investment banking, tax, actuarial and other services), software licensors, marketing and advertising firms, securities underwriters and others. Generally, these agreements obligate the Company to indemnify the third parties only if certain events occur or claims are made, as these contingent events or claims are defined in each of these agreements. The Company believes that the resolution of any claims that might arise in the future, either individually or in the aggregate, would not materially affect the earnings or financial condition of the Company.
NOTE 15 RETIREMENT PLANS
The Company has two domestic defined benefit plans, the account balance defined benefit pension plan (the “ABP Plan”) and the Crew defined benefit plan (the “Crew Plan”), together referred to as the “Plans”, covering all eligible employees of the Company.
The Crew Plan discontinued employee participation and accruing additional employee benefits in 2001. In February 2006, the Company announced that it would freeze the ABP Plan as of December 31, 2006. Beginning January 1, 2007, no new participants entered the ABP Plan, although participant account balances continue to receive interest credits of approximately 6% on existing account balances. Beginning January 1, 2007, Company benefits credited to ABP Plan participant accounts which were historically made based on a percentage of participant salary and years of service are no longer made. In the fourth quarter of 2006, the Company decided to terminate the Plans. The Company has received approval of the termination of the Plans by the Pension Benefit Guaranty Corporation and the IRS by the third quarter of 2008. In accordance with SFAS No. 158, the Company obtained an updated actuarial valuation of the unfunded pension liability at September 28, 2008. In addition, in accordance with the terms of the merger with Triarc (see Note 19), the Company contributed $9,000 to the ABP Plan in the third quarter of 2008. The Company’s remaining unfunded pension liability at September 28, 2008 is estimated to be approximately $6,700 which has been accrued is included in accrued expenses in the accompanying condensed consolidated balance sheet. The Company intends to distribute lump sum payments or purchase annuities to settle all plan benefits in the fourth quarter of 2008.
In third quarter and year-to-date 2008, the Company recognized approximately $829 and $2,398, respectively, of pretax non-cash pension settlement charges ($829 and $2,316 of which was reflected in restructuring charges), which were related to cash distributions made to participants from the Plans, of approximately $2,769 and $7,375, respectively. In third quarter and year-to-date 2007, the Company recognized approximately $1,099 and $6,558, respectively, in pretax non-cash pension settlement charges (of which, $1,100 and $6,400 was reflected in restructuring charges), which were related to cash distributions made to participants from the Plans, of approximately $2,842 and $17,398, respectively.
Net periodic pension cost for the Plans for the quarter and year-to-date periods ended September 28, 2008 and September 30, 2007 consisted of the following:
| | | Quarter Ended | | | Year-to-Date Ended | |
| (In thousands) | | September 28, 2008 | | | September 30, 2007 | | | September 28, 2008 | | | September 30, 2007 | |
| Interest cost | | $ | 942 | | | $ | 935 | | | $ | 2,867 | | | $ | 3,603 | |
| Expected return on plan assets | | | (922 | ) | | | (847 | ) | | | (2,732 | ) | | | (3,335 | ) |
| Amortization of net loss | | | 595 | | | | 564 | | | | 1,799 | | | | 1,990 | |
| Net periodic pension cost | | $ | 615 | | | $ | 652 | | | $ | 1,934 | | | $ | 2,258 | |
NOTE 16 REVENUES
Revenues consisted of the following:
| | | Quarter Ended | | | Year-to-Date Ended | |
| (In thousands) | | September 28, 2008 | | | September 30, 2007 | | | September 28, 2008 | | | September 30, 2007 | |
| Sales: | | | | | | | | | | | | |
| Sales from company operated restaurants | | $ | 522,929 | | | $ | 531,006 | | | $ | 1,543,283 | | | $ | 1,563,842 | |
| Product sales to franchises | | | 25,182 | | | | 23,802 | | | | 73,930 | | | | 72,222 | |
| | | | 548,111 | | | | 554,808 | | | | 1,617,213 | | | | 1,636,064 | |
| Franchise revenues: | | | | | | | | | | | | | | | | |
| Rents and royalties | | | 75,601 | | | | 74,238 | | | | 220,406 | | | | 214,144 | |
| Franchise fees | | | 1,174 | | | | 738 | | | | 2,334 | | | | 2,025 | |
| | | | 76,775 | | | | 74,976 | | | | 222,740 | | | | 216,169 | |
| Total revenues | | $ | 624,886 | | | $ | 629,784 | | | $ | 1,839,953 | | | $ | 1,852,233 | |
NOTE 17 FAIR VALUE
At September 28, 2008 and December 30, 2007, cash and cash equivalents included approximately $141,238 and $156,480, respectively, of institutional money market fund investments. These investments are measured at fair value using quoted market prices for identical assets (the highest Level 1 fair value measure identified by Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”).
NOTE 18 MERGER
In April 2007, the Company announced that its Board of Directors, acting unanimously, had formed a Special Committee of independent directors to investigate strategic options for the Company. On April 23, 2008, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Triarc Companies, Inc. The Merger was approved by the board of directors of both companies in April 2008 and shareholders and stockholders of Wendy’s and Triarc, respectively, in September 2008. The Merger was completed on September 29, 2008.
Pursuant to the terms of the Merger Agreement, each common share of the Company was converted into the right to receive 4.25 (the “Exchange Ratio”) shares of Class A Common Stock, par value $0.10 per share, of Wendy’s/Arby’s Group, Inc. (the “Wendy’s/Arby’s Group Class A Common Stock”). The Company’s employee stock options and other equity awards generally converted upon consummation of the Merger and without any action on the part of the holder into stock options and equity awards with respect to the Wendy’s/Arby’s Group Class A Common Stock, after giving effect to the Exchange Ratio. Cash will be paid to the Company’s shareholders in lieu of fractional shares of Wendy’s/Arby’s Group’s Class A Common Stock.
In connection with the Merger Agreement, the Company amended its Amended and Restated Rights Agreement (as amended, the “Rights Agreement”). The amendment made the Rights Agreement inapplicable to the Merger, the Merger Agreement and the associated voting agreements and provided for the expiration of the Rights (as defined in the Rights Agreement) immediately prior to the effective time of the Merger if the Rights have not otherwise expired. As a result of the completion of the Merger, the Rights expired on September 29, 2008. Also, the Merger Agreement provided that the Company would deliver or cause to be delivered, such officers certificates, opinions of counsel and supplemental indentures, if any, required by the indentures governing the Company’s 6.25% Senior Notes due 2011, 6.20% Senior Notes due 2014 and 7.00% Debentures due 2025, necessary to effect the Merger without any default or event of default arising as a result of the Merger. The required certificates, opinions and supplemental indentures were delivered on September 29, 2008.
Since the announcement of the execution of the Merger Agreement on April 24, 2008, several purported class action lawsuits have been filed by shareholders of the Company in Ohio and New York state courts. The plaintiffs assert claims of breach of fiduciary duty against the Company and against certain of its officers and directors in connection with the Merger and failure to disclose material information related to the Merger in the Form S-4 that Triarc filed with the Securities and Exchange Commission. The complaints seek, among other things, injunctive relief against consummation of the Merger, declaratory judgments for breach of fiduciary duties, attorney’s fees and damages in an unspecified amount.
On August 13, 2008, counsel for the parties in these lawsuits entered into a memorandum of understanding in which they agreed upon the terms of a settlement of all such lawsuits, which would include the dismissal with prejudice, and release, of all claims against all the defendants, including the Company, its directors, Wendy’s/Arby’s and Trian Partners., a management company formed by the Chairman and Vice Chairman and an other director of Wendy’s/Arby’s. In connection with the settlement, the Company agreed to make certain additional disclosures to its shareholders, which were contained in the final Form S-4 filed by Triarc with the SEC, and to pay plaintiffs’ legal fees. The Company believes it has adequately accrued for the costs related to the settlement of these lawsuits at September 28, 2008.
The memorandum of understanding also contemplates that the parties will enter into a stipulation of settlement. There can be no assurance that the parties will ultimately enter into such stipulation of settlement or that the court will approve the settlement even if the parties were to enter into such stipulation. In such event, the proposed settlement as contemplated by the memorandum of understanding may be terminated.
The defendants believe that these lawsuits are without merit and intend to vigorously defend them in the event that the parties do not enter in the stipulation of settlement or if court approval is not obtained. While the Company does not believe that these actions will have a material adverse effect on its financial condition or results of operations, unfavorable rulings could occur. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the Company’s results of operations for the period in which the ruling occurs or for future periods.
REVIEW OF THE RESULTS OF OPERATIONS
Overview
Effective September 29, 2008, Triarc Companies, Inc. (“Triarc”) and Wendy’s International, Inc. and subsidiaries (the “Company”) completed their previously announced merger. Triarc, as renamed Wendy’s/Arby’s Group, Inc., will be the acquiror for financial accounting purposes.
The Company completed the sale of Cafe Express on July 29, 2007. Accordingly, the after-tax operating results of Cafe Express are now included in the income from discontinued operations line on the unaudited consolidated condensed statements of operations for all periods presented.
The Company’s reported net loss was ($29.9) million for third quarter 2008 compared to net income of $29.9 million for third quarter 2007. For the nine months of 2008 to date, the Company’s net loss was ($5.8) million compared to net income of $73.8 million for the same nine months in 2007. The results of continuing operations decreased in the third quarter 2008 from income of $28.8 million in 2007 to a loss ($29.9) million in 2008 and decreased from income of $72.6 million for the first nine months of 2007 to a loss of ($5.8) million for the first nine months of 2008. The comparative third quarter and year-to-date declines in continuing operations were a result of a decrease in operating income and charges related to the activities of the Special Committee of the Board of Directors (the “Special Committee”), which included merger related fees, costs related to change in control provisions in executive employment agreements and merger related equity compensation costs, a portion of which did not require the use of cash. The Special Committee was formed in April, 2007 to investigate strategic options for the Company. These factors were partially offset by decreases in the income tax expense in each comparable period. Before the facilities relocation and corporate restructuring and Special Committee related charges which aggregated $69.8 million and $15.9 million for the three months ended September 28, 2008 and September 30, 2007, respectively, and $86.8 million and $27.5 million for the nine months ended September 28, 2008 and September 30, 2007, respectively, third quarter 2008 adjusted operating income was lower than the same 2007 period by $16.9 million, or 25.3%, and 2008 year-to-date adjusted operating income was $42.4 million, or 26.1%, lower than the same 2007 period. The Company uses adjusted operating income as an internal measure of operating performance. Management believes adjusted operating income provides a meaningful perspective of the underlying operating performance of the business.
The decrease in adjusted operating income from continuing operations for the third quarter of 2008 as compared to the same period in 2007 was primarily due to a decrease in Company operated restaurant margins, which is defined as sales less the sum of cost of sales and advertising, divided by sales. Company operated restaurant margins in the third quarter 2008 decreased by 2.9% over 2007, primarily reflecting higher commodity costs, transaction count declines, an unfavorable product mix and higher advertising for breakfast, which started in the third quarter of 2007, partially offset by menu price increases.
The decrease in adjusted operating income results from continuing operations for the nine-month period of 2008 as compared to the same period in 2007 reflects the same factors described above for the third quarter comparison. In addition, general and administrative expenses for the nine month 2008 period were approximately $8.9 million higher than the same period in 2007 as discussed below. Year-to-date 2008 Company operated restaurant margins were lower than 2007 by 1.9% due primarily to higher commodity costs, transaction count declines, increases in our labor rate which were not offset by labor efficiencies, including higher advertising for breakfast which started in the third quarter of 2007, and an unfavorable product mix, partially offset by menu price increases.
Average same-store sales results for U.S. Company and U.S. franchised restaurants for the third quarter and year-to-date 2008 as compared to prior year and the number of U.S. Company and U.S. franchised restaurants open at the end of each period are listed in the table below. Franchisee operations are not included in the Company’s financial statements; however, franchisee sales result in royalties and rental income, which are included in the Company’s franchise revenues.
The following table presents information for U.S. Company-operated restaurants for the quarter and year-to-date periods ended September 28, 2008 and September 30, 2007, and includes sales derived from the Company’s new breakfast program.
