SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2006
| ¨ | TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-8116
WENDY’S INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
| Ohio | 31-0785108 | |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer 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
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
|
Common Shares, $.10 stated value (95,721,252 shares outstanding at February 2, 2007) |
New York Stock Exchange |
| Preferred Stock Purchase Rights | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES x NO ¨ .
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x .
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one); Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ .
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x .
The aggregate market value of the voting stock held by non-affiliates of the Registrant computed by reference to the price at which such voting stock was last sold, as of June 30, 2006, was $6,855,624,000.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant’s 2007 Proxy Statement, which will be filed no later than 120 days after December 31, 2006, are incorporated by reference into Part III hereof.
Exhibit index on pages 87-89.
WENDY’S INTERNATIONAL, INC.
2006 FORM 10-K ANNUAL REPORT
| Item 1. | Business |
The Company
Wendy’s International, Inc. was incorporated in 1969 under the laws of the State of Ohio. Wendy’s International, Inc. and its subsidiaries are collectively referred to herein as the “ Company .”
The Company is primarily engaged in the business of operating, developing and franchising a system of distinctive quick-service restaurants serving high quality food. At December 31, 2006, there were 6,673 Wendy’s restaurants (“ Wendy’s ”) in operation in the United States and in 20 other countries and territories. Of these restaurants, 1,465 were operated by the Company and 5,208 by the Company’s franchisees.
On March 29, 2006, the Company completed its initial public offering (“ IPO ”) of Tim Hortons Inc. (“ THI ”). A total of 33.4 million shares of THI were offered at an initial per share price of $23.162 ($27.00 Canadian). The shares sold in the IPO represented 17.25% of total THI shares issued and outstanding and the Company retained the remaining 82.75%. On September 29, 2006, the Company completed the spin-off of its remaining 82.75% ownership in THI, the parent company of the business previously reported as the Hortons segment. Accordingly, the results of operations of THI are reflected as discontinued operations for all periods presented and the assets and liabilities are reflected as discontinued operations at January 1, 2006. During the third quarter of 2006, the Company’s Board of Directors approved the sale of Baja Fresh and on November 28, 2006, the Company completed the sale and, accordingly, the results of operations of Baja Fresh are reflected as discontinued operations for all periods presented and the assets and liabilities of Baja Fresh are reflected as discontinued operations at January 1, 2006. On October 9, 2006, the Company’s Board of Directors approved the future sale of Cafe Express and, accordingly, the results of operations and assets and liabilities of Cafe Express are reflected as discontinued operations for all periods presented (see Note 10 to the Consolidated Financial Statements). Baja Fresh and Cafe Express were previously reported as the Developing Brands segment.
Operations
Each Wendy’s restaurant offers a relatively standard menu featuring hamburgers and filet of chicken breast sandwiches, which are prepared to order with the customer’s choice of condiments. Wendy’s menu also includes chicken nuggets, chili, baked and French fried potatoes, prepared salads, desserts, soft drinks and other non-alcoholic beverages and kids meals. In addition, the restaurants sell a variety of promotional products on a limited basis.
The Company strives to maintain quality and uniformity throughout all restaurants by publishing detailed specifications for food products, preparation and service, by continual in-service training of employees and by field visits from Company supervisors. In the case of franchisees, field visits are made by Company personnel who review operations, including quality, service and cleanliness and make recommendations to assist in compliance with Company specifications.
Generally, the Company does not sell food or supplies, other than sandwich buns and kids’ meal toys, to its Wendy’s franchisees. However, the Company has arranged for volume purchases of many of these products. Under the purchasing arrangements, independent distributors purchase certain products directly from approved suppliers and then store and sell them to local company and franchised restaurants. These programs help assure availability of products and provide quantity discounts, quality control and efficient distribution. These advantages are available both to the Company and to its franchisees.
The New Bakery Co. of Ohio, Inc. (“ Bakery ”), a wholly-owned subsidiary of the Company, is a producer of buns for Wendy’s restaurants, and to a lesser extent for outside parties. At December 31, 2006, the Bakery supplied
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640 restaurants operated by the Company and 2,340 restaurants operated by franchisees. At the present time, the Bakery does not manufacture or sell any other products.
See Note 15 on pages 76 and 77 of the Financial Statements and Supplementary Data included in Item 8 herein, for financial information attributable to certain geographical areas.
Raw Materials
The Company and its franchisees have not experienced any material shortages of food, equipment, fixtures or other products which are necessary to restaurant operations. The Company anticipates no such shortages of products and alternate suppliers are available.
Trademarks and Service Marks of the Company
The Company has registered certain trademarks and service marks in the United States Patent and Trademark office and in international jurisdictions, some of which include “Wendy’s”, “Old Fashioned Hamburgers” and “Quality Is Our Recipe”. The Company believes that these and other related marks are of material importance to the Company’s business. Domestic trademarks and service marks expire at various times from 2007 to 2017, while international trademarks and service marks have various durations of five to 20 years. The Company generally intends to renew trademarks and service marks which are scheduled to expire.
The Company entered into an Assignment of Rights Agreement with the Company’s Founder, R. David Thomas, and his wife dated as of November 5, 2000 (the “ Assignment ”). The Company has used Mr. Thomas, who was Senior Chairman of the Board until his death on January 8, 2002, as a spokesperson and focal point for its products and services for many years. With the efforts and attributes of Mr. Thomas, the Company has, through its extensive investment in the advertising and promotional use of Mr. Thomas’ name, likeness, image, voice, caricature, endorsement rights and photographs (the “ Thomas Persona ”), made the Thomas Persona well known in the U.S. and throughout North America and a valuable asset for both the Company and Mr. Thomas’ estate. Under the terms of the Assignment, the Company acquired the entire right, title, interest and ownership in and to the Thomas Persona, including the sole and exclusive right to commercially use the Thomas Persona.
Seasonality
The Company’s business is moderately seasonal. Wendy’s average restaurant sales are normally higher during the summer months than during the winter months. Because our business is moderately seasonal, results for any quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.
Working Capital Practices
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, potential share repurchases, dividends, repayment of debt, future acquisitions of restaurants from franchisees or other corporate purposes.
Competition
Each company and franchised restaurant is in competition with other food service operations within the same geographical area. The quick-service restaurant segment is highly competitive. The Company competes with other organizations primarily through the quality, variety and value perception of food products offered. The
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number and location of units, quality and speed of service, attractiveness of facilities, effectiveness of marketing and new product development by the Company and its competitors are also important factors. The price charged for each menu item may vary from market to market depending on competitive pricing and the local cost structure.
The Company’s competitive position at its Wendy’s restaurants is enhanced by its use of fresh ground beef, its unique and diverse menu, promotional products, its wide choice of condiments and the atmosphere and decor of its restaurants.
Research and Development
The Company engages in research and development on an ongoing basis, testing new products and procedures for possible introduction into the Company’s systems. While research and development operations are considered to be of prime importance to the Company, amounts expended for these activities are generally not deemed material.
Government Regulations
A number of states have enacted legislation which, together with rules promulgated by the Federal Trade Commission, affect companies involved in franchising. Much of the legislation and rules adopted have been aimed at requiring detailed disclosure to a prospective franchisee and periodic registration by the franchisor with state administrative agencies. Additionally, some states have enacted, and others have considered, legislation which governs the termination or non-renewal of a franchise agreement and other aspects of the franchise relationship. The United States Congress has also considered legislation of this nature. The Company has complied with requirements of this type in all applicable jurisdictions. The Company cannot predict the effect on its operations, particularly on its relationship with franchisees, of future enactment of additional legislation. Various other government initiatives such as minimum wage rates and taxes can all have a significant impact on the Company’s performance.
Environment and Energy
Various federal, state and local regulations have been adopted which affect the discharge of materials into the environment or which otherwise relate to the protection of the environment. The Company does not believe that such regulations will have a material effect on its capital expenditures, earnings or competitive position. The Company cannot predict the effect of future environmental legislation or regulations.
The Company’s principal sources of energy for its operations are electricity and natural gas. To date, the supply of energy available to the Company has been sufficient to maintain normal operations.
Acquisitions and Dispositions
The Company has from time to time acquired the interests of and sold Wendy’s restaurants to franchisees, and it is anticipated that the Company may have opportunities for such transactions in the future. The Company generally retains a right of first refusal in connection with any proposed sale of a franchisee’s interest. The Company will continue to sell and acquire Wendy’s restaurants in the future where prudent.
See Notes 7 and 8 on page 64 of the Financial Statements and Supplementary Data included in Item 8 herein, and the information under “Management’s Outlook” in Item 7 herein for further information regarding acquisitions and dispositions.
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International Operations
Markets in Canada are currently being developed for both company owned and franchised restaurants of Wendy’s. The Company is evaluating expansion into other international markets but to date has not made significant investments in these markets. The Company has granted development rights for the countries and territories listed under Item 2 on page 13 of this Form 10-K.
Franchised Wendy’s Restaurants
As of December 31, 2006, the Company’s franchisees operated 5,208 Wendy’s restaurants in 50 states, Canada and 18 other countries and territories.
The rights and obligations governing the majority of franchised restaurants operating in the United States are set forth under Wendy’s Unit Franchise Agreement. This document provides the franchisee the right to construct, own and operate a Wendy’s restaurant upon a site accepted by Wendy’s and to use the Wendy’s system in connection with the operation of the restaurant at that site. The Unit Franchise Agreement provides for a 20-year term and a 10-year renewal subject to certain conditions. Wendy’s has in the past franchised under different agreements on a multi-unit basis; however, Wendy’s now generally grants new Wendy’s franchises on a unit-by-unit basis.
The Wendy’s Unit Franchise Agreement requires that the franchisee pay a royalty of 4% of gross sales, as defined in the agreement, from the operation of the restaurant. The agreement also typically requires that the franchisee pay the Company a technical assistance fee. In the United States, the standard technical assistance fee required under a newly executed Unit Franchise Agreement is currently $25,000 for each restaurant.
The technical assistance fee is used to defray some of the costs to the Company in providing technical assistance in the development of the Wendy’s restaurant, initial training of franchisees or their operator and in providing other assistance associated with the opening of the Wendy’s restaurant. In certain limited instances (like the regranting of franchise rights or the relocation of an existing restaurant), Wendy’s may charge a reduced technical assistance fee or may waive the technical assistance fee. The Company does not select or employ personnel on behalf of the franchisees.
Wendy’s has in certain instances in the past offered to qualified franchisees, pursuant to its Franchise Real Estate Development program, the option of Wendy’s locating and securing real estate for new store development and/or constructing a new store. Under this program, Wendy’s obtains all licenses and permits necessary to construct and operate the restaurant, with the franchisee having the option of building the restaurant or having Wendy’s construct it. The franchisee pays Wendy’s a fee for this service and reimburses Wendy’s for all out-of-pocket costs and expenses Wendy’s incurs in locating, securing, and/or constructing the new store. Wendy’s has announced that it does not intend to offer the Franchise Real Estate Development program in the future.
The rights and obligations governing franchisees who wish to develop internationally are currently contained in the Franchise Agreement and Services Agreement (the “ Agreements ”) which are issued upon approval of a restaurant site. The Agreements are for an initial term of 20 years or the term of the lease for the restaurant site, whichever is shorter. The Agreements license the franchisee to use the Company’s trademarks and know-how in the operation of the restaurant. Upon execution of the Agreements, the franchisee is required to pay a technical assistance fee. Generally, the technical assistance fee is $30,000 for each restaurant. Currently, the franchisee is required to pay monthly fees, usually 4%, based on the monthly gross sales of the restaurant, as defined in the Agreements.
See Schedule II on page 86 of this Form 10-K, and Management’s Discussion and Analysis on pages 20 through 36 and Note 9 on pages 64 and 65 of the Financial Statements and Supplementary Data included in Item 8 herein for further information regarding reserves, commitments and contingencies involving franchisees.
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Advertising and Promotions
The Company participates in two advertising funds established to collect and administer funds contributed for use in advertising through television, radio, newspapers, the internet and a variety of promotional campaigns. Separate advertising funds are administered for Wendy’s U.S and Wendy’s of Canada. Contributions to the advertising funds are required to be made from both company operated and franchise restaurants and are based on a percent of restaurant retail sales. In addition to the contributions to the various advertising funds, the Company may require additional contributions to be made for both company operated and franchisee restaurants based on a percent of restaurant retail sales for the purpose of local and regional advertising programs. Required franchisee contributions to the advertising funds and for local and regional advertising programs are governed by the Wendy’s franchise agreement. Required contributions by company operated restaurants for advertising and promotional programs are at the same percent of retail sales as franchised restaurants within the Wendy’s system.
See Note 14 on page 76 of the Financial Statements and Supplementary Data included in Item 8 herein, for further information regarding advertising.
Personnel
As of December 31, 2006, the Company employed approximately 46,000 people, of whom approximately 45,000 were employed in company operated restaurants. The total number of full-time employees at that date was approximately 7,000. The Company believes that its employee relations are satisfactory.
Availability of Information
The Company makes available through its internet website (www.wendys-invest.com) its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after electronically filing such material with the Securities and Exchange Commission (“ SEC ”). The reference to the Company’s website address does not constitute incorporation by reference of the information contained on the website and should not be considered part of this document.
| Item 1A. | Risk Factors |
This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. Investors should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. The Company is under no obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. These forward-looking statements are all based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. The Company’s actual future results and trends may differ materially depending on a variety of factors including, but not limited to, the risks and uncertainties discussed below.
The quick service restaurant segment is highly competitive, and that competition could lower revenues, margins and market share.
The quick service restaurant segment of the foodservice industry is intensely competitive regarding price, service, location, personnel and type and quality of food. The Company and its franchisees compete with international, regional and local organizations primarily through the quality, variety and value perception of food products offered. Other key competitive factors include the number and location of restaurants, quality and speed of service, attractiveness of facilities, effectiveness of advertising and marketing programs, and new product
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development by the Company and its competitors. The Company anticipates intense competition will continue to focus on pricing. Some of the Company’s competitors have substantially larger marketing budgets, which may provide them with a competitive advantage. In addition, the Company’s system competes within the food service market and the quick service restaurant segment not only for customers but also for management and hourly employees, suitable real estate sites and qualified franchisees. If the Company is unable to maintain its competitive position, it could experience downward pressure on prices, lower demand for products, reduced margins, the inability to take advantage of new business opportunities and the loss of market share.
Changes in economic, market and other conditions could adversely affect the Company and its franchisees, and thereby the Company’s operating results.
The quick-service restaurant industry is affected by changes in international, national, regional, and local economic conditions, consumer preferences and spending patterns, demographic trends, consumer perceptions of food safety, weather, traffic patterns, the type, number and location of competing restaurants, and the effects of war or terrorist activities and any governmental responses thereto. Factors such as inflation, food costs, labor and benefit costs, legal claims, and the availability of management and hourly employees also affect restaurant operations and administrative expenses. The ability of the Company and its franchisees to finance new restaurant development, improvements and additions to existing restaurants, and the acquisition of restaurants from, and sale of restaurants to, franchisees is affected by economic conditions, including interest rates and other government policies impacting land and construction costs and the cost and availability of borrowed funds.
Events reported in the media, such as incidents involving food-borne illnesses or food tampering, whether or not accurate, can cause damage to the Company’s reputation and swiftly affect sales and profitability.
Reports, whether true or not, of food-borne illnesses (such as E. coli, avian flu, bovine spongiform encephalopathy, hepatitis A, trichinosis or salmonella) and food tampering have in the past severely injured the reputations of participants in the quick service restaurant segment and could in the future affect the Company as well. The Company’s reputation is an important asset to the business; as a result, anything that damages brand reputation could immediately and severely hurt systemwide sales and, accordingly, revenues and profits. If customers become ill from food-borne illnesses, the Company could also be forced to temporarily close some restaurants. In addition, instances of food-borne illnesses or food tampering, even those occurring solely at the restaurants of competitors, could, by resulting in negative publicity about the restaurant industry, adversely affect system sales on a local, regional or systemwide basis. A decrease in customer traffic as a result of these health concerns or negative publicity, or as a result of a temporary closure of any of the Company’s restaurants, could materially harm the Company’s business.
Failure to successfully implement the Company’s growth strategy could reduce, or reduce the growth of, the Company’s revenue and net income.
The Company plans to increase the number of Wendy’s restaurants over the next five years, but may not be able to achieve its growth objectives and any new restaurants may not be profitable. The opening and success of restaurants depends on various factors, including:
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competition from other quick service restaurants in current and future markets; |
| • |
the degree of saturation in existing markets; |
| • |
the identification and availability of suitable and economically viable locations; |
| • |
sales levels at existing restaurants; |
| • |
the negotiation of acceptable lease or purchase terms for new locations; |
| • |
permitting and regulatory compliance; |
| • |
the ability to meet construction schedules; |
| • |
the availability of qualified franchisees and their financial and other development capabilities (including their ability to obtain acceptable financing); |
| • |
the ability to hire and train qualified management personnel; and |
| • |
general economic and business conditions. |
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If the Company is unable to open new restaurants as planned, if the stores are less profitable than anticipated or if the Company is otherwise unable to successfully implement its growth strategy, revenue and profitability may grow more slowly or even decrease, which could cause the Company’s stock price to decrease.
The Company intends to expand into the breakfast daypart, where competitive conditions are challenging, the Wendy’s brand is not well known and markets may prove difficult to penetrate.
The Company plans to expand breakfast to more than 50% of its restaurants by late 2008. Many of the markets into which the Company intends to roll out breakfast will have challenging competitive conditions, varied consumer tastes and discretionary spending patterns that differ from its existing dayparts. In addition, breakfast sales could cannibalize lunch sales and may have negative implications on food and labor costs and restaurant margins. The Company will need to build breakfast brand awareness through greater investments in advertising and promotional activities. Capital investments will also be required at company operated restaurants and franchised restaurants where breakfast will be served and franchisees could elect not to participate in the breakfast expansion. As a result of the foregoing, breakfast sales and profits therefrom may take longer to reach expected levels or may never do so.
The Company and its franchisees are affected by commodity market fluctuations, which could reduce profitability or sales and shortages or interruptions in the supply or delivery of perishable food products could damage the Company’s reputation and adversely affect its operating results.
The Company and its franchisees purchase large quantities of food and supplies, which can be subject to significant price fluctuations due to seasonal shifts, climate conditions, industry demand, changes in international commodity markets and other factors. The Company and its franchisees are dependent on frequent deliveries of perishable food products that meet certain specifications. Shortages or interruptions in the supply of perishable food products caused by unanticipated demand, problems in production or distribution, disease or food-borne illnesses, inclement weather or other conditions could adversely affect the availability, quality and cost of ingredients, which would likely lower revenues, damage the Company’s reputation and otherwise harm its business.
Current restaurant locations may become unattractive, and attractive new locations may not be available for a reasonable price, if at all.
The success of any restaurant depends in substantial part on its location. There can be no assurance that current locations will continue to be attractive as demographic patterns change. Neighborhood or economic conditions where restaurants are located could decline in the future, thus resulting in potentially reduced sales in those locations. If the Company and its franchisees cannot obtain desirable locations at reasonable prices the ability to effect the Company’s growth strategy will be adversely affected.
Changing health or dietary preferences may cause consumers to avoid products offered by the Company in favor of alternative foods.
The foodservice industry is affected by consumer preferences and perceptions. If prevailing health or dietary preferences and perceptions cause consumers to avoid these products offered by the Company’s restaurants in favor of alternative or healthier foods, demand for the Company’s products may be reduced and its business could be harmed.
The Company is subject to health, employment, environmental and other government regulations, and failure to comply with existing or future government regulations could expose the Company to litigation, damage the Company’s reputation and lower profits.
The Company and its franchisees are subject to various federal, state and local laws affecting their businesses. The successful development and operation of restaurants depend to a significant extent on the selection and acquisition of suitable sites, which are subject to zoning, land use (including the placement of drive-thru
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windows), environmental (including litter), traffic and other regulations. Restaurant operations are also subject to licensing and regulation by state and local departments relating to health, food preparation, sanitation and safety standards, federal and state labor laws (including applicable minimum wage requirements, overtime, working and safety conditions and citizenship requirements), federal and state laws prohibiting discrimination and other laws regulating the design and operation of facilities, such as the Americans with Disabilities Act of 1990. If the Company fails to comply with any of these laws, it may be subject to governmental action or litigation, and its reputation could be accordingly harmed. Injury to the Company’s reputation would, in turn, likely reduce revenues and profits.
In recent years, there has been an increased legislative, regulatory and consumer focus on nutrition and advertising practices in the food industry, particularly among quick service restaurants. As a result, the Company may become subject to regulatory initiatives in the area of nutrition disclosure or advertising, such as requirements to provide information about the nutritional content of its food products, which could increase expenses. The operation of the Company’s franchise system is also subject to franchise laws and regulations enacted by a number of states and rules promulgated by the U.S. Federal Trade Commission. Any future legislation regulating franchise relationships may negatively affect the Company’s operations, particularly its relationship with its franchisees. Failure to comply with new or existing franchise laws and regulations in any jurisdiction or to obtain required government approvals could result in a ban or temporary suspension on future franchise sales. Changes in applicable accounting rules imposed by governmental regulators or private governing bodies could also affect the Company’s reported results of operations, and thus cause its stock price to fluctuate or decline.
Litigation from customers, franchisees, employees and others could harm the Company’s reputation and impact operating results.
Claims of illness or injury relating to food quality or food handling are common in the food service industry. In addition, class action lawsuits have been filed, and may continue to be filed, against various quick service restaurants alleging, among other things, that quick service restaurants have failed to disclose the health risks associated with high-fat foods and that quick service restaurants’ marketing practices have encouraged obesity. In addition to decreasing the Company’s sales and profitability and diverting management resources, adverse publicity or a substantial judgment against the Company could negatively impact the Company’s reputation, hindering the ability to attract and retain qualified franchisees and grow the business.
Further, the Company may be subject to employee, franchisee and other claims in the future based on, among other things, discrimination, harassment, wrongful termination and wage, rest break and meal break issues, including those relating to overtime compensation. These types of claims, as well as other types of lawsuits to which the Company is subject to from time to time, can distract management’s attention from core business operations.
The Company may not be able to adequately protect its intellectual property, which could decrease the value of the Company and its products.
The success of the Company’s business depends on the continued ability to use existing trademarks, service marks and other components of the Company’s brand in order to increase brand awareness and further develop branded products. The Company may not be able to adequately protect its trademarks, and the use of these trademarks may result in liability for trademark infringement, trademark dilution or unfair competition. All of the steps the Company has taken to protect its intellectual property may not be adequate.
The Company’s earnings and business growth strategy depends in large part on the success of its franchisees, and the Company’s reputation may be harmed by actions taken by franchisees that are outside of the Company’s control.
A portion of the Company’s earnings comes from royalties, rents and other amounts paid by the Company’s franchisees. Franchisees are independent contractors, and their employees are not employees of the Company.
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The Company provides training and support to, and monitors the operations of, its franchisees, but the quality of their restaurant operations may be diminished by any number of factors beyond the Company’s control. Consequently, franchisees may not successfully operate stores in a manner consistent with the Company’s high standards and requirements and franchisees may not hire and train qualified managers and other restaurant personnel. Any operational shortcoming of a franchise restaurant is likely to be attributed by consumers to the Company’s system, thus damaging the Company’s reputation and potentially affecting revenues and profitability.
Ownership and leasing of significant amounts of real estate exposes the Company to possible liabilities and losses.
The Company owns the land and building, or leases the land and/or the building, for many system restaurants. Accordingly, the Company is subject to all of the risks associated with owning and leasing real estate. In particular, the value of the Company’s assets could decrease, and its costs could increase, because of changes in the investment climate for real estate, demographic trends and supply or demand for the use of the restaurants, which may result from competition from similar restaurants in the area, as well as liability for environmental conditions. The Company generally cannot cancel these leases. If an existing or future store is not profitable, and the Company decides to close it, the Company may nonetheless be committed to perform its obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. In addition, as each of the leases expires, the Company may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause the Company to close stores in desirable locations.
The Company’s annual and quarterly financial results may fluctuate depending on various factors, many of which are beyond its control, and, if the Company fails to meet the expectations of securities analysts or investors, the Company’s share price may decline.
The Company’s sales and operating results can vary from quarter to quarter and year to year depending on various factors, many of which are beyond its control. Certain events and factors may directly and immediately decrease demand for the Company’s products. If customer demand decreases rapidly, the Company’s results of operations would also decline precipitously. These events and factors include:
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variations in the timing and volume of the Company’s sales and franchisees’ sales; |
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sales promotions by the Company and its competitors; |
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changes in average same-store sales and customer visits; |
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variations in the price, availability and shipping costs of supplies; |
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seasonal effects on demand for the Company’s products; |
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unexpected slowdowns in new store development efforts; |
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changes in competitive and economic conditions generally; |
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changes in the cost or availability of ingredients or labor; |
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weather and acts of God; |
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changes in the number of franchise agreement renewals; and |
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foreign currency exposure. |
Catastrophic events may disrupt the Company’s business.
Unforeseen events, including war, terrorism and other international conflicts, public health issues, and natural disasters such as earthquakes, hurricanes or other adverse weather and climate conditions, whether occurring in the United States or abroad, could disrupt the Company’s operations, disrupt the operations of franchisees, suppliers or customers, or result in political or economic instability. These events could reduce demand for the Company’s products or make it difficult or impossible receive products from suppliers.
The Company’s international operations are subject to various factors of uncertainty.
The Company’s business outside of the United States is subject to a number of additional factors, including international economic and political conditions, differing cultures and consumer preferences, currency
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regulations and fluctuations, diverse government regulations and tax systems, uncertain or differing interpretations of rights and obligations in connection with international franchise agreements and the collection of royalties from international franchisees, the availability and cost of land and construction costs, and the availability of experienced management, appropriate franchisees, and joint venture partners. Although the Company believes it has developed the support structure required for international growth, there is no assurance that such growth will occur or that international operations will be profitable.
The Company may from time to time sell real estate and company operated restaurants to its franchisees.
The disposition of company operated restaurants to new or existing franchisees is part of the Company’s strategy to develop the overall health of the system by acquiring restaurants from, and disposing of restaurants to, franchisees where prudent. The realization of gains from future dispositions of restaurants depends in part on the ability of the Company to complete disposition transactions on acceptable terms. The sale of real estate previously leased to franchisees is generally part of the program to improve the Company’s return on invested capital. There are various reasons why the program might be unsuccessful, including changes in economic, credit market, real estate market or other conditions, and the ability of the Company to complete sale transactions on acceptable terms and at or near the prices estimated as attainable by the Company.
| Item 1B. | Unresolved Staff Comments |
In November 2006, the Company received written comments from the staff of the SEC regarding the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2006, to which the Company has provided an initial response. The staff of the SEC has recently verbally requested that the Company provide additional information with respect to one of its responses and the Company is in the process of responding to that request. The Company does not expect its response to the staff’s verbal request to have a material effect on its financial statements.
| Item 2. | Properties |
Wendy’s uses outside contractors in the construction of its restaurants. The restaurants are built to Company specifications as to exterior style and interior decor. The majority are free-standing, one-story brick buildings, substantially uniform in design and appearance, constructed on sites of approximately 40,000 square feet, with parking for approximately 45 cars. Some restaurants, located in downtown areas or shopping malls, are of a store-front type and vary according to available locations but generally retain the standard sign and interior decor. The typical new free-standing restaurant contains approximately 2,900 square feet and has a food preparation area, a dining room capacity for approximately 90 persons and a double pick-up window for drive-through service. The restaurants are generally located in urban or heavily populated suburban areas, and their success depends upon serving a large number of customers. Wendy’s provides a facility for rural and less populated areas that has a building size of approximately 2,100 square feet and approximately 60 seats. This unit provides full double drive-through capacity. Wendy’s also operates restaurants in special site locations such as travel centers, gas station/convenience stores, military bases, arenas, malls, hospitals, airports and college campuses.
There are also a number of existing Wendy’s and THI concepts combined in single free-standing units which average about 5,780 square feet. These units are leased from the 50/50 restaurant real estate joint venture between Wendy’s and THI and share a common dining room seating from approximately 100 to 130 persons. Each unit has separate Wendy’s and THI food preparation and storage areas and most have separate pick-up windows for each concept. The Company does not intend to open a significant number of new combo units going forward.
The Company remodels its restaurants on a periodic basis to maintain a fresh image, providing convenience for its customers and increasing the overall efficiency of restaurant operations.
At December 31, 2006, the Company and its franchisees operated 6,673 Wendy’s restaurants. Of the 1,465 company operated Wendy’s restaurants, the Company owned the land and building for 644 restaurants, owned the building and held long-term land leases for 570 restaurants and held leases covering land and building for 251 restaurants. The Company’s land and building leases are generally written for terms of 10 to 25 years with one or more five-year renewal options. In certain lease agreements the Company has the option to purchase the real
10
estate. Certain leases require the payment of additional rent equal to a percentage, generally less than 6%, of annual sales in excess of specified amounts. Some of the real estate owned by the Company is subject to mortgages which mature over various terms. The Company also owned land and buildings for, or leased, 248 Wendy’s restaurant locations which were leased or subleased to franchisees. Surplus land and buildings are generally held for sale.
The Bakery operates two facilities in Zanesville, Ohio that produce hamburger buns for Wendy’s restaurants. The hamburger buns are distributed to both company operated and franchisee restaurants using primarily the Bakery’s fleet of trucks. As of December 31, 2006 the Bakery employed approximately 353 people at the two facilities that had a combined size of approximately 205,000 square feet.
11
The location of company and franchise restaurants is set forth below.
| Wendy’s | ||||
|
State |
Company | Franchise | ||
|
Alabama |
— | 98 | ||
|
Alaska |
— | 8 | ||
|
Arizona |
48 | 54 | ||
|
Arkansas |
— | 64 | ||
|
California |
66 | 228 | ||
|
Colorado |
47 | 82 | ||
|
Connecticut |
5 | 43 | ||
|
Delaware |
— | 15 | ||
|
Florida |
200 | 302 | ||
|
Georgia |
53 | 243 | ||
|
Hawaii |
7 | — | ||
|
Idaho |
— | 29 | ||
|
Illinois |
94 | 87 | ||
|
Indiana |
5 | 171 | ||
|
Iowa |
— | 47 | ||
|
Kansas |
19 | 55 | ||
|
Kentucky |
3 | 139 | ||
|
Louisiana |
70 | 65 | ||
|
Maine |
4 | 17 | ||
|
Maryland |
— | 115 | ||
|
Massachusetts |
61 | 34 | ||
|
Michigan |
30 | 248 | ||
|
Minnesota |
— | 69 | ||
|
Mississippi |
8 | 90 | ||
|
Missouri |
24 | 49 | ||
|
Montana |
— | 16 | ||
|
Nebraska |
— | 34 | ||
|
Nevada |
— | 47 | ||
|
New Hampshire |
4 | 23 | ||
|
New Jersey |
17 | 126 | ||
|
New Mexico |
— | 38 | ||
|
New York |
67 | 156 | ||
|
North Carolina |
40 | 206 | ||
|
North Dakota |
— | 8 | ||
|
Ohio |
89 | 353 | ||
|
Oklahoma |
— | 41 | ||
|
Oregon |
24 | 31 | ||
|
Pennsylvania |
80 | 187 | ||
|
Rhode Island |
10 | 12 | ||
|
South Carolina |
— | 128 | ||
|
South Dakota |
— | 9 | ||
|
Tennessee |
— | 183 | ||
|
Texas |
84 | 314 | ||
|
Utah |
61 | 23 | ||
|
Vermont |
— | 6 | ||
|
Virginia |
48 | 164 | ||
|
Washington |
27 | 46 | ||
|
West Virginia |
22 | 50 | ||
|
Wisconsin |
— | 65 | ||
|
Wyoming |
— | 14 | ||
|
District of Columbia |
— | 6 | ||
|
Domestic Subtotal |
1,317 | 4,638 | ||
12
| Wendy’s | ||||
|
Country/Territory |
Company | Franchise | ||
|
Aruba |
— | 3 | ||
|
Bahamas |
— | 7 | ||
|
Canada |
146 | 231 | ||
|
Cayman Islands |
— | 2 | ||
|
Costa Rica |
— | 2 | ||
|
Dominican Republic |
— | 1 | ||
|
El Salvador |
— | 12 | ||
|
Guam |
2 | — | ||
|
Guatemala |
— | 6 | ||
|
Honduras |
— | 24 | ||
|
Indonesia |
— | 20 | ||
|
Jamaica |
— | 2 | ||
|
Japan |
— | 78 | ||
|
Mexico |
— | 17 | ||
|
New Zealand |
— | 16 | ||
|
Panama |
— | 6 | ||
|
Philippines |
— | 40 | ||
|
Puerto Rico |
— | 61 | ||
|
Venezuela |
— | 39 | ||
|
Virgin Islands |
— | 3 | ||
|
International Subtotal |
148 | 570 | ||
|
Grand Total |
1,465 | 5,208 | ||
| Item 3. | Legal Proceedings |
The Company and its subsidiaries are parties to various legal actions and complaints arising in the ordinary course of business. Many of these are covered by the Company’s self-insurance or other insurance programs. Reserves related to the resolution of legal proceedings are included on the Company’s Consolidated Balance Sheets, as a liability under “Accrued Expenses Other.” It is the opinion of the Company that the ultimate resolution of such matters will not materially affect the Company’s financial condition or earnings.
| Item 4. | Submission of Matters to a Vote of Security Holders |
None.
13
| Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities |
Wendy’s International, Inc. common shares are traded on the New York, Boston, Chicago, Pacific and Philadelphia Stock Exchanges (trading symbol: WEN). Options in
Market Price of Common Stock
| 2006 | High | Low | Close | ||||||
|
First Quarter |
$ | 66.35 | $ | 53.90 | $ | 62.06 | |||
|
Second Quarter |
63.65 | 56.25 | 58.29 | ||||||
|
Third Quarter |
67.19 | 57.54 | 67.00 | ||||||
|
Fourth Quarter (1) |
35.95 | 31.75 | 33.09 | ||||||
| 2005 | High | Low | Close | ||||||
|
First Quarter |
$ | 41.15 | $ | 36.73 | $ | 39.15 | |||
|
Second Quarter |
48.50 | 38.04 | 47.64 | ||||||
|
Third Quarter |
53.62 | 43.58 | 45.15 | ||||||
|
Fourth Quarter |
56.40 | 43.88 | 55.26 | ||||||
| (1) | On September 29, 2006, the Company distributed 1.3542759 shares of THI common stock for each outstanding share of Wendy’s common stock in the form of a pro rata stock dividend. After the distribution, the market price of the Company’s stock reflected the value of the Company excluding THI. See Note 6 of the Financial Statements and Supplementary Data included in Item 8 herein for additional information on the THI distribution. |
At February 23, 2007, the Company had approximately 107,500 shareholders of record.
Dividends Declared and Paid Per Share
| Quarter | 2006 | 2005 | ||||
|
First |
$ | .17 | $ | .135 | ||
|
Second |
.17 | .135 | ||||
|
Third |
.17 | .135 | ||||
|
Fourth (1) |
.085 | .17 | ||||
| (1) | On September 29, 2006, the Company distributed 1.3542759 shares of THI common stock for each outstanding share of Wendy’s common stock in the form of a pro rata stock dividend. After the distribution, the Company reduced its dividend to $.085. The Company’s adjusted annual dividend rate beginning in the fourth quarter of 2006 of $0.34 plus the value of the THI annual dividend of $0.25 per share U.S. (as of October 2006) times the spin-off distribution ratio of 1.3542759 is equivalent to the Company’s previous $0.68 annual dividend prior to the spin-off. See Note 6 of the Financial Statements and Supplementary Data included in Item 8 herein for additional information on the THI distribution. |
See Note 6 on pages 61 through 64 of the Financial Statements and Supplementary Data included in Item 8 herein for information on related stockholder matters.
14
The following table sets forth, as of the end of the Company’s last fiscal year, (a) the number of securities that could be issued upon exercise of outstanding options and vesting of outstanding restricted stock units and restricted stock awards under the Company’s equity compensation plans, (b) the weighted-average exercise price of outstanding options under such plans, and (c) the number of securities remaining available for future issuance under such plans, excluding securities that could be issued upon exercise of outstanding options.
| EQUITY COMPENSATION PLAN INFORMATION | |||||||
| Plan Category |
Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) |
Weighted- average exercise price of outstanding options, warrants and rights (b) |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) |
||||
|
Equity compensation plans approved by security holders |
2,502,603 | $ | 15.6476 | 818,075 | |||
|
Equity compensation plans not approved by security holders |
381,499 | $ | 13.7075 | 497,009 | |||
|
Total |
2,884,102 | $ | 15.2293 | 1,315,084 | |||
Included in the 2,884,102 total number of securities in column (a) above are approximately 1.0 million restricted stock units and restricted stock awards. The weighted-average exercise price in column (b) is based only on stock options as restricted stock units and restricted stock awards have no exercise price.
On August 2, 1990, the Board of Directors adopted the WeShare Stock Option Plan (the “ WeShare Plan ”), a non-qualified stock option plan that provided for grants of options equal to 10% of each eligible employee’s earnings, with a minimum of 20 options to be granted to each eligible employee annually. Beginning in 2002, options equal to 8-12% of each eligible employee’s earnings could be granted annually under the WeShare Plan. The percentage of each eligible employee’s earnings was determined by the Company’s annual performance as measured by earnings per share growth and the Company’s three-year average total shareholder return relative to the Standard & Poor’s 500 Index. Most employees of the Company and its subsidiaries who were full-time employees on the grant date and on December 31 of the year preceding the grant date were eligible employees. On August 2, 1990, the Board of Directors adopted the 1990 Stock Option Plan (“ 1990 Plan ”) for issuance of equity awards to key employees and outside directors. On April 22, 2004, the Company’s shareholders approved the 2003 Stock Incentive Plan (“ 2003 Plan ”) for issuance of equity awards to employees and outside directors. In aggregate 1.3 million shares are reserved under the WeShare Plan, the 1990 Plan and the 2003 Plan as of December 31, 2006.
Options granted under the WeShare Plan, 1990 Plan and 2003 Plan had a term of 10 years from the grant date and became exercisable in installments of 25% on each of the first four anniversaries of the grant date. Under the original terms of these grants, these exercise dates could be accelerated if the Company was involved in certain merger, consolidation, reclassification or exchange of securities transactions as specified in each of the respective plans. If an employee’s employment is terminated for any reason other than death, disability, termination without cause in connection with the disposition of one or more restaurants or retirement, the options will be canceled as of the date of such termination. If the employee’s employment is terminated by reason of his or her death, disability or termination without cause in connection with the disposition of one or more restaurants (“disposition termination”), the options will become immediately exercisable and may be exercised at any time during the 12-month period after his or her death, disposition termination or date of becoming disabled, subject to the stated term of the options. If the employee’s employment is terminated by reason of his or her retirement, the options may be exercised during the 48-month period after the retirement date, subject to the stated term of the options. The Company had granted options under the WeShare Plan annually to several thousand employees. However, the Company no longer makes grants of options under the WeShare Plan or the 1990 Plan and did not make any
15
option grants under the 2003 Plan in 2006. The WeShare Plan has not been submitted to the shareholders of the Company for approval as permitted under current New York Stock Exchange listing requirements.
Restricted stock unit grants under the 2003 Plan generally vest over a 30 month period for employees in Canada and over a four year period for U.S. employees.
On October 27, 2005, the Compensation Committee (the “Committee” ) of the Board of Directors of the Company, after discussion with the Board, approved accelerating the vesting, effective October 27, 2005, of approximately 3.2 million stock options, representing all then outstanding, unvested stock options granted under the Company’s (i) 1990 Plan, as amended; (ii) WeShare Plan, as amended; and (iii) 2003 Plan; as amended (collectively, the “ Plans ”), that were held by then current employees, including all executive officers, and employees who retired with unvested stock options after having attained age 55 with at least 10 years of service with the Company or its subsidiaries. The vesting of stock options held by the independent directors of the Company was not changed by this action. Except as described below for executive officers, all other terms and conditions of each stock option award remain the same.
The Committee’s decision to accelerate the vesting of all then outstanding, unvested stock options granted under the Plans only affected stock option awards granted from October 31, 2001, through 2004. It did not affect stock option awards granted prior to October 31, 2001 and prior years since those options had already vested and no stock options were granted by the Company in 2005 as the Company transitioned from stock options to restricted stock and restricted stock unit awards. The Committee’s acceleration decision did not affect restricted stock unit awards. Of the total number of stock options accelerated, approximately 463,000 were held by executive officers at October 27, 2005.
The Committee imposed a holding period that will require all executive officers to refrain from selling shares acquired upon the exercise of these accelerated options (other than shares needed to cover the exercise price, applicable transaction fees and satisfying withholding taxes) until the date on which the exercise would have been permitted under the option’s original vesting terms or, if earlier, the executive officer’s death, disability or termination of employment. The decision to accelerate the vesting of these stock options was made primarily to reduce non-cash compensation expense that would have been recorded in future periods following the Company’s adoption of Financial Accounting Standards Board Statement No. 123, “Share Based Payment (revised 2004)” (“ SFAS 123R ”). In addition, the decision to accelerate the vesting of stock options is expected to have a positive effect on employee morale, retention and perception of value at various levels of the enterprise. The acceleration of vesting does not alter the vesting of restricted stock, restricted stock units or performance shares held by directors, officers and employees of the Company. SFAS No. 123R: (i) generally requires recognizing compensation cost for the grant-date fair value of stock options and other equity-based compensation over the requisite service period; (ii) applies to all awards granted, modified, vesting, repurchased or cancelled after the required effective date; and (iii) was effective for the Company as of the beginning of its first quarter 2006. The future expense that was eliminated as a result of the acceleration of the vesting of these options is estimated to be approximately $8 million, $3 million and $1 million in 2006, 2007 and 2008, respectively. In 2005, as a result of modifying the vesting period of the options, the Company’s continuing operations included $3.5 million in compensation expense in accordance with FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation”. The expense represents the estimated number of stock options that would have been forfeited according to the original terms of the options that will no longer be forfeited due to the acceleration of the vesting, at the intrinsic value of the options on the date vesting was accelerated.
On September 29, 2006, the Company completed the spin-off of THI. The distribution took place in the form of a pro rata common stock dividend to the Company’s shareholders of record as of Friday, September 15, 2006. Shareholders received 1.3542759 shares of THI common stock for each share of the Company’s common stock held. Cash was paid for fractional share interests. In total, the Company distributed 159,952,977 shares of THI common stock to its shareholders, representing all of the shares of THI that Wendy’s owned as of September 29, 2006. In conjunction with the spin-off of THI, directors, officers and employees of the Company holding options,
16
restricted stock units (including accrued dividend equivalent units) and performance shares did not receive shares of THI in the spin-off distribution on the common shares underlying those equity awards. Pursuant to the provisions of the Plans, to preserve the economic value of those equity awards as they existed prior to the spin-off, the Committee approved an adjustment to all outstanding options, restricted stock units (including accrued dividend equivalent units) and performance shares. The equity award adjustment was effected by dividing the number of shares underlying the equity awards by 0.4828 and by multiplying the stock option exercise price by the same adjustment ratio. This adjustment ratio was obtained by dividing the “ex-dividend” opening price of the Company’s common stock on the New York Stock Exchange on October 2, 2006 ($32.35), the first trading day after the spin-off, by the closing price of the Company’s common stock in the “regular way” market on September 29, 2006 ($67.00). There was no compensation expense charge associated with this conversion.
The following table presents the Company’s repurchases of its common stock for each of the three periods included in the fourth quarter ended December 31,
ISSUER PURCHASES OF EQUITY SECURITIES
| Period |
(a) Total Number of Shares Purchased |
(b) Average Price Paid Per Share |
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs (1) |
|||||
|
Period 10 (October 2, 2006
|
0 | $ | 0 | 0 | 35,400,000 | ||||
|
Period 11 (November 6, 2006
|
22,413,278 | $ | 35.75 | 22,413,278 | 12,986,722 | ||||
|
Period 12 (December 4, 2006
|
0 | $ | 0 | 0 | 12,986,722 | ||||
|
Total |
22,413,278 | $ | 35.75 | 22,413,278 | 12,986,722 | ||||
(1) On October 9, 2006 the Company’s Board of Directors authorized the repurchase of up to 35.4 million common shares of the Company to be implemented over 18-24 months from the date of authorization. This authorization replaced all prior authorizations, including the $907.3 million authorization remaining at October 1, 2006. The 22.4 million shares repurchased in Period 11 were repurchased pursuant to the terms of a modified “Dutch Auction” tender offer, which was initiated on October 18, 2006 and completed on November 16, 2006.
17
| Item 6. | Selected Financial Data |
Selected Financial Data
(Information included below excludes amounts related to discontinued operations, except where otherwise noted)
|
Operations (in millions) |
2006 | 2005 | 2004 | (1) | 2003 | 2002 | |||||||
|
Revenues (2) |
$ | 2,439 | 2,455 | 2,502 | 2,252 | 2,060 | |||||||
|
Sales (2) |
$ | 2,155 | 2,138 | 2,194 | 1,960 | 1,781 | |||||||
|
Income from continuing operations before income taxes |
$ | 42 | 137 | 176 | 182 | 192 | |||||||
|
Income from continuing operations |
$ | 37 | 85 | 106 | 120 | 122 | |||||||
|
Income (loss) from discontinued operations (3) |
$ | 57 | 139 | (54 | ) | 116 | 97 | ||||||
|
Net income (3) |
$ | 94 | 224 | 52 | 236 | 219 | |||||||
|
Capital expenditures |
$ | 110 | 181 | 166 | 214 | 240 | |||||||
|
Per Share Data |
|||||||||||||
|
Diluted earnings per common share from continuing operations |
$ | .32 | .73 | .92 | 1.04 | 1.06 | |||||||
|
Diluted earnings (loss) per common share from discontinued operations |
$ | .50 | 1.19 | (.47 | ) | 1.01 | .83 | ||||||
|
Total diluted earnings per common share (including discontinued operations) |
$ | .82 | 1.92 | .45 | 2.05 | 1.89 | |||||||
|
Dividends declared and paid per common share |
$ | .60 | .58 | .48 | .24 | .24 | |||||||
|
Market price at year-end (4) |
$ | 33.09 | 55.26 | 39.26 | 39.24 | 27.07 | |||||||
|
Financial Position (in millions) |
|||||||||||||
|
Total assets (including discontinued operations) |
$ | 2,060 | 3,440 | 3,198 | 3,133 | 2,680 | |||||||
|
Property and equipment, net |
$ | 1,226 | 1,348 | 1,512 | 1,462 | 1,324 | |||||||
|
Long-term obligations |
$ | 556 | 540 | 539 | 639 | 645 | |||||||
|
Shareholders’ equity (including discontinued operations) |
$ | 1,012 | 2,059 | 1,716 | 1,759 | 1,449 | |||||||
|
Ratios |
|||||||||||||
|
Company operated store margins (5) |
% | 8.9 | 8.6 | 10.9 | 13.1 | 14.5 | |||||||
|
Pretax profit margin (6) |
% | 1.7 | 5.6 | 7.0 | 8.1 | 9.3 | |||||||
|
Return on average assets (7) |
% | 2.8 | 7.0 | 1.7 | 8.4 | 9.2 | |||||||
|
Return on average equity (8) |
% | 4.7 | 11.9 | 2.9 | 14.9 | 17.0 | |||||||
|
Long-term debt to equity (9) |
% | 55 | 26 | 31 | 36 | 45 | |||||||
|
Debt to total capitalization (10) |
% | 34 | 21 | 23 | 26 | 31 | |||||||
|
Price to earnings (11) |
40 | 29 | 87 | 19 | 14 | ||||||||
| (1) | Fiscal year includes 53 weeks. |
| (2) | During the year, the Company revised its presentation of the sale of kids’ meal toys to reflect the sales on a gross versus net basis under the provisions of Emerging Issues Task Force (“ EITF ”) 99-19. “Reporting Revenue Gross as a Principal versus Net as an Agent”. The revised presentation had no impact on operating income or net income. Amounts related to the prior years were not material, but were revised for purposes of comparability. The revisions increased sales and cost of sales $59.4 million, $61.6 million, $69.1 million, $61.0 million and $49.8 million for fiscal years 2006, 2005, 2004, 2003 and 2002, respectively. |
| (3) | Includes results of operations for THI, Baja Fresh and Cafe Express. |
| (4) | On September 29, 2006, the Company distributed 1.3542759 shares of THI common stock for each outstanding share of Wendy’s common stock in the form of a pro rata stock dividend. After the distribution, the market price of the Company’s stock reflected the value of the Company excluding THI. See Note 6 of the Financial Statements and Supplementary Data included in Item 8 herein for additional information on the THI distribution. |
| (5) | Company operated store margins are computed as store sales less store cost of sales and company restaurant operating costs, divided by store sales. |
| (6) | Pretax profit margin is computed by dividing income from continuing operations before income taxes by revenues. |
| (7) | Return on average assets is computed by dividing net income (including discontinued operations) by average assets over the previous five quarters, excluding advertising fund restricted assets. |
| (8) | Return on average equity is computed by dividing net income (including discontinued operations) by average shareholders’ equity over the previous five quarters. |
| (9) | Long-term debt to equity is computed by dividing long-term debt (excluding discontinued operations) by shareholders’ equity. |
| (10) | Debt to total capitalization is computed by dividing long-term debt (excluding discontinued operations) by total capitalization. |
| (11) | Price to earnings is computed using the year-end stock price divided by the diluted earnings per share for the year including discontinued operations. |
18
| Other Information | |||||||||||||||||||||||||
|
Restaurant Data |
2006 | 2005 | 2004 | * | 2003 | 2002 | 2001 | 2000 | 1999 | 1998 | * | 1997 | 1996 | ||||||||||||
|
North American Wendy’s open at year-end |
|||||||||||||||||||||||||
|
Company |
1,463 | 1,497 | 1,482 | 1,460 | 1,316 | 1,223 | 1,148 | 1,082 | 1,021 | 1,186 | 1,306 | ||||||||||||||
|
Franchise |
4,869 | 4,898 | 4,837 | 4,668 | 4,587 | 4,431 | 4,271 | 4,079 | 3,922 | 3,634 | 3,292 | ||||||||||||||
|
International Wendy’s open at year-end |
|||||||||||||||||||||||||
|
Company |
2 | 5 | 5 | 5 | 4 | 5 | 5 | 30 | 15 | 16 | 9 | ||||||||||||||
|
Franchise |
339 | 346 | 347 | 348 | 346 | 384 | 368 | 336 | 375 | 371 | 326 | ||||||||||||||
|
Total Wendy’s |
6,673 | 6,746 | 6,671 | 6,481 | 6,253 | 6,043 | 5,792 | 5,527 | 5,333 | 5,207 | 4,933 | ||||||||||||||
|
Average net sales per domestic |
|||||||||||||||||||||||||
|
Wendy’s restaurant (in thousands) |
|||||||||||||||||||||||||
|
Company |
$ | 1,400 | 1,365 | 1,416 | 1,389 | 1,387 | 1,337 | 1,314 | 1,284 | 1,174 | 1,111 | 1,049 | |||||||||||||
|
Franchise |
$ | 1,276 | 1,263 | 1,291 | 1,268 | 1,251 | 1,164 | 1,130 | 1,102 | 1,031 | 1,017 | 978 | |||||||||||||
|
Total domestic |
$ | 1,303 | 1,286 | 1,319 | 1,294 | 1,280 | 1,199 | 1,167 | 1,138 | 1,062 | 1,042 | 998 | |||||||||||||
|
Per Share Data |
|||||||||||||||||||||||||
|
Dividends |
$ | .60 | .58 | .48 | .24 | .24 | .24 | .24 | .24 | .24 | .24 | .24 | |||||||||||||
|
Market price at year-end ** |
$ | 33.09 | 55.26 | 39.26 | 39.24 | 27.07 | 29.17 | 26.25 | 20.81 | 21.81 | 22.88 | 20.88 | |||||||||||||
| * | Fiscal year includes 53 weeks. |
| ** | On September 29, 2006, the Company distributed 1.3542759 shares of THI common stock for each outstanding share of Wendy’s common stock in the form of a pro rata stock dividend. After the distribution, the market price of the Company’s stock reflected the value of the Company excluding THI. See Note 6 of the Financial Statements and Supplementary Data included in Item 8 herein for additional information on the THI distribution. |
19
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Executive Overview
Wendy’s International, Inc. and subsidiaries (the “ Company ”) completed the initial public offering (“ IPO ”) of Tim Hortons Inc. (“ THI ”) in March 2006, the spin-off of THI on September 29, 2006 and the sale of Baja Fresh on November 28, 2006. During the fourth quarter 2006, the Company also approved the prospective disposition of Cafe Express. Accordingly, the after-tax operating results of THI, Baja Fresh and Cafe Express appear in the “Discontinued Operations” line on the income statement for all years presented.
The Company reported net income of $94.3 million compared to $224.1 million in 2005 and $52.0 million in 2004. Income from continuing operations declined from $85.1 million in 2005 to $37.0 million in 2006 reflecting $25.0 million pretax ($15.5 million after tax) in incremental contributions to the Wendy’s National Advertising Program (“ WNAP ”), incremental costs incurred in connection with the Company’s restructuring initiatives of $38.9 million pretax ($24.1 million after tax), the decline of franchise rent revenue of $16.8 million pretax ($10.4 million after tax) due primarily to the sale of properties previously leased to franchisees, higher general and administrative expenses of $16.7 million pretax ($10.3 million after tax) and the impact of 2005 store closure and asset sales. The 2005 amounts included $62.7 million pretax ($39.0 million after tax) on the sale of certain properties previously leased to franchisees and $27.1 million pretax ($16.8 million after tax) related to store closures, asset impairments and other costs related to sites no longer considered for development. These net decreases were partially offset by a $33.9 million pretax 2006 increase in interest income, due primarily to higher cash balances from the THI IPO, and lower pretax interest expense of $7.4 million due primarily to the repayment of $100 million in debt in 2005.
Income from continuing operations declined from $106.1 million in 2004 to $85.1 million in 2005, primarily reflecting average same-store sales declines, higher beef costs (up 12%) and $27.1 million pretax ($16.8 million after tax) in restaurant closure and fixed asset impairment charges, all partially offset by $62.7 million pretax ($39.0 million after tax) in gains on sales of property previously leased to franchisees.
One of the key indicators in the restaurant industry that management monitors to assess the health of the Company is average same-store sales. This metric provides information on total sales at restaurants operating during the relevant period and provides a useful comparison between periods, in addition to the opening of new stores. Average same-store sales results for domestic company operated and domestic franchised restaurants 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.
| 2006 Average Same-Store Sales Increases/(Decreases) | |||||||||||||||
| 1 st Quarter | 2 nd Quarter | 3 rd Quarter | 4 th Quarter | 2006 | |||||||||||
|
Domestic company restaurants |
(4.8 | )% | 0.7 | % | 4.1 | % | 3.1 | % | 0.8 | % | |||||
|
Domestic franchise restaurants |
(5.2 | )% | 1.0 | % | 3.9 | % | 2.7 | % | 0.6 | % | |||||
For comparative purposes, average same-store sales changes at domestic company operated and domestic franchised restaurants for 2005 are shown in the table below.
| 2005 Average Same-Store Sales Increases/(Decreases) | |||||||||||||||
| 1 st Quarter | 2 nd Quarter | 3 rd Quarter | 4 th Quarter | 2005 | |||||||||||
|
Domestic company restaurants |
(2.2 | )% | (4.6 | )% | (5.0 | )% | (2.9 | )% | (3.7 | )% | |||||
|
Domestic franchise restaurants |
(1.0 | )% | (3.9 | )% | (5.5 | )% | (1.8 | )% | (3.1 | )% | |||||
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Other financial and operating highlights include:
| n |
The Company and its franchisees opened a total of 122 new restaurants during 2006, including 26 company operated restaurants and 96 franchised restaurants. This reflects the slowing of store development as the Company focuses on improving store margins. |
| n |
During 2006 the Company announced a restructuring program to eliminate approximately $100 million of costs, including $80 million from its reported continuing operations. Although some of the savings from this effort were realized in 2006, most of the savings will be realized in 2007. |
| n |
The Company repurchased 26.2 million shares in 2006 for $1.0 billion, including 22.4 million shares for $804.4 million in a modified “Dutch Auction” tender offer in the fourth quarter. |
| n |
In February 2007, the Company announced its intention to increase its annual cash dividend from $0.34 per share to $0.50 per share beginning with the quarterly dividend to be paid May 2007. |
A summary of systemwide restaurants is included on page 35.
Company Operated Restaurant Margins
The Company’s restaurant margins are computed as store sales less store cost of sales and company restaurant operating costs, divided by store sales. Depreciation is not included in the calculation of company operated restaurant margins. Company operated restaurant margins improved to 8.9% in 2006 compared to 8.6% in 2005, primarily reflecting improvements in cost of sales. The 2005 company operated restaurant margins declined from 10.9% in 2004 to 8.6% primarily reflecting lower average same-store sales and higher beef costs.
Sales
The Company’s sales are comprised of sales from company operated restaurants, sales of kids’ meal toys to franchisees and sales of sandwich buns from the Company’s bun baking facilities to franchisees. Franchisee sales are not included in reported sales. Of total sales, domestic company store sales comprised approximately 88% in each period presented, while the remainder primarily represented Canadian company store sales.
The $16.2 million increase in sales in 2006 versus 2005 primarily included the impact from a strengthening Canadian dollar of approximately $13 million and the impact of higher average same-store sales at company operated restaurants, offset by fewer U.S. company operated restaurants open during the year, as the Company closed 29 underperforming company operated restaurants in 2006.
The $55.7 million decrease in sales in 2005 versus 2004 primarily represents lower average same-store sales at company operated restaurants and the impact of 2005 being a 52-week year versus 53 weeks in 2004, partially offset by an increase in the number of company operated restaurants open. Total company operated restaurants open at year-end 2006 were 1,465 versus 1,502 at year-end 2005 and 1,487 at year-end 2004.
The following table summarizes various restaurant statistics for domestic company operated restaurants for the years indicated:
| 2006 | 2005 | 2004 | |||||||
|
Average same-store sales increase (decrease) |
0.8% | (3.7)% | 2.9% | ||||||
|
Company operated restaurants open at year-end |
1,317 | 1,345 | 1,328 | ||||||
|
Average unit volumes |
$ | 1,400,000 | $ | 1,365,000 | $ | 1,416,000 | |||
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Franchise Revenues
The Company’s franchise revenues include royalty income from franchisees, rental income from properties leased to franchisees, gains from the sales of properties to franchisees and franchise fees. Franchise fees cover charges for various costs and expenses related to establishing a franchisee’s business.
The $32.4 million decrease in franchise revenues in 2006 versus 2005 primarily reflects $16.8 million in lower rental income due to the sale of sites previously leased to franchisees during 2005 and early 2006. The decrease also reflects the absence of $16.3 million in gains on sales of properties leased to franchisees that occurred in 2005.
The $8.9 million increase in franchise revenues in 2005 versus 2004 primarily reflects a higher number of franchise restaurants open and 2005 gains of $16.3 million on sales of properties leased to franchisees. These increases were partially offset by an extra week of revenues in 2004 and average same-store sales decreases in franchise restaurants.
The following table summarizes various restaurant statistics for domestic franchised restaurants for the years indicated:
| 2006 | 2005 | 2004 | |||||||
|
Average same-store sales increase (decrease) |
0.6% | (3.1)% | 1.8% | ||||||
|
Franchise restaurants open at year-end |
4,638 | 4,673 | 4,607 | ||||||
|
Average unit volumes |
$ | 1,276,000 | $ | 1,263,000 | $ | 1,291,000 | |||
Cost of Sales
Cost of sales includes food, paper and labor costs for company operated restaurants, and the cost of goods sold to franchisees related to kids’ meal toys and from the Company’s bun baking facilities. Of the total cost of sales, domestic company operated restaurant cost of sales comprised approximately 87% in each period presented, while the remainder primarily represented Canadian company operated restaurants. Overall, cost of sales as a percent of sales was 62.7% in 2006, 63.7% in 2005 and 62.4% in 2004.
Domestic company operated restaurant cost of sales were 61.5% of domestic company operated restaurant sales in 2006, compared with 62.5% in 2005 and 61.1% in 2004. Domestic food and paper costs were 32.8% of domestic company operated restaurant sales in 2006, compared with 33.8% in 2005 and 33.3% in 2004. The decrease in 2006 versus 2005 primarily reflects lower commodity costs, including an approximate 8% decline in beef, and improved menu management, with the introduction of higher-margin products. The increase in 2005 versus 2004 primarily reflects an increase in commodity costs, including higher beef costs of approximately 12%.
Domestic labor costs were 27.8% of domestic company operated restaurant sales in 2006, compared with 27.8% in 2005 and 26.8% in 2004. The increase in 2006 versus 2005 primarily reflects an average labor rate increase of 2.3%, partially offset by the favorable impact from the closure of lower volume stores in 2005, an average same-store sales increase in company operated restaurants and productivity improvements. The increase in 2005 versus 2004 primarily reflects the impact of lower average sales.
Company Restaurant Operating Costs
Company restaurant operating costs include costs necessary to manage and operate company restaurants, except cost of sales and depreciation. Of the total company restaurant operating costs, domestic company stores comprised approximately 90% in each period presented, while the remainder primarily represented Canadian company stores.
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As a percent of company operated restaurant sales, company restaurant operating costs were 28.5% in 2006, 27.8% in 2005 and 26.9% in 2004. The 2006 increase versus 2005 primarily reflects higher utilities of $6.6 million, higher performance-based incentive compensation of $4.4 million, as well as higher costs for property management, insurance and supplies. These increases were partially offset by lower group insurance reserves of $4.1 million due to favorable claims experience. The 2005 increase as a percent of company restaurant sales versus 2004 primarily reflects negative average same-store sales in 2005.
Operating Costs
Operating costs include rent expense and other costs related to properties subleased to franchisees, other franchisee related costs and costs related to operating and maintaining the Company’s bun baking facilities.
The $26.3 million increase in operating costs in 2006 versus 2005 primarily reflects a $25.0 million special contribution to the WNAP, as well as $3.4 million in payments related to a distributor commitment and $1.2 million in 2006 for franchise remodel incentives. These increases were partially offset by lower rent expense due to the fact that a 50/50 joint venture between Wendy’s and THI is no longer consolidated as a result of the spin-off of THI in September 2006, and therefore, this rent is no longer included in operating costs. For the first nine months of 2006, this rent totaled approximately $6 million.
Total operating costs in 2005 were essentially even with 2004.
Depreciation of property and equipment
Consolidated depreciation of property and equipment decreased 4.2% in 2006 and increased 16.7% in 2005. The decrease in 2006 versus 2005 primarily reflects a reduction in the number of company operated restaurants. The increase in 2005 versus 2004 primarily reflects additional restaurant development and a depreciation expense reduction recorded in 2004 related to a lease correction.
General and Administrative Expenses
General and administrative expenses increased $16.7 million, or 7.6%, to $237.6 million versus 2005. As a percent of revenues, general and administrative expenses were higher in 2006 at 9.7% versus 9.0% in 2005. The dollar and percent increase in 2006 includes incremental expense for performance-based incentive compensation of $10.9 million, $9.2 million in incremental consulting and professional fees and $7.4 million in higher costs related to breakfast. These increases were partially offset by lower salary and benefit costs of $14.8 million.
In 2005, general and administrative expenses increased $10.7 million, or 5.1%, to $220.9 million versus 2004. As a percent of revenues, general and administrative expenses were higher in 2005 at 9.0% versus 8.4% in 2004. The dollar and percent increase in 2005 includes incremental compensation expense of $8.9 million related to the Company’s restricted shares award program implemented in the second quarter of 2004, compensation expense related to the accelerated vesting of the Company’s outstanding stock options of $3.5 million, higher salaries and wages of $3.9 million and a decrease in revenues. These increases were partially offset by reduced performance-based incentive compensation of $10.4 million.
Other Expense (Income), Net
Other expense (income), net includes amounts that are not directly derived from the Company’s primary business. These include expenses related to store closures, restructuring costs, sales of properties to non-franchisees, joint venture rent revenue and reserves for legal issues.
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The following is a summary of other expense (income), net for each of the years indicated:
| (In thousands) | 2006 | 2005 | 2004 | |||||||||
|
Restructuring costs |
$ | 38,914 | $ | 0 | $ | 0 | ||||||
|
Store closing costs |
16,737 | 24,696 | 0 | |||||||||
|
Rent revenue |
(14,021 | ) | (16,359 | ) | (14,401 | ) | ||||||
|
(Gain) loss from property dispositions |
(6,833 | ) | (46,855 | ) | 464 | |||||||
|
Equity investments and other, net |
2,671 | 4,255 | 12,608 | |||||||||
|
Other expense (income), net |
$ | 37,468 | $ | (34,263 | ) | $ | (1,329 | ) | ||||
Restructuring costs
In the first quarter of 2006, the Company announced its plans to reduce general and administrative and other costs $100 million, including $80 million in the continuing Wendy’s business. In order to accomplish this, the Company offered a voluntary enhanced retirement plan to certain full-time employees who were 55 years of age and had at least 10 years of service. Benefits primarily included severance and healthcare coverage. In accordance with SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, in 2006, the Company recorded $16.5 million in charges related to the individuals that accepted the offer. This amount also includes $2.5 million of additional stock compensation expense for unvested restricted stock units resulting from the acceleration of vesting to the employees’ retirement dates, in accordance with the Company’s stock compensation plan. In the fourth quarter of 2006, the Company recognized a $3.9 million settlement charge as a result of distributions from the Company’s defined benefit pension plan, primarily related to those individuals who participated in the voluntary enhanced retirement plan.
In the second quarter of 2006, the Company initiated a reduction in force, also intended to contribute to the cost reductions. In accordance with SFAS No. 112, “Employers’ Accounting for Postemployment Benefits”, in 2006 the Company recorded severance and related costs of $13.3 million related to this reduction in force, which includes $4.1 million of severance costs related to certain senior executives who left the Company in 2006. Substantially all of the $13.3 million of costs began being paid in the third quarter of 2006 and will continue through 2007. Approximately $1.0 million of these costs represented additional stock compensation expense related to the modification of stock-based equity awards. In the third quarter of 2006, the Company revised its estimate related to the expected payout for certain employees included in the reduction in force. This revision of estimates resulted in a reduction of expense of $1.9 million.
In addition to the employee related costs above, the Company incurred professional fees of $3.6 million in 2006 in connection with the cost reduction initiatives described above, all of which have been paid. Also, the Company incurred $1.9 million in relocation and employee benefit costs in the 2006 associated with the cost reduction initiatives, the significant majority of which have been paid.
Store closures
The Company recorded store closure charges of $16.7 million and $24.7 million in 2006 and 2005, respectively, including asset impairments and lease termination costs.
Rent revenue
Rent revenue included in other (income) expense, net represents rent paid by THI to a 50/50 restaurant real estate joint venture between Wendy’s and THI. After the spin-off of THI on September 29, 2006, this joint venture is no longer consolidated in the Company’s financial statements and only Wendy’s 50% share of the joint venture income is included in other (income) expense, net, under the equity accounting method.
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(Gain) loss from property dispositions
The 2006 gain from property dispositions includes $5.5 million of gains related to properties held for sale. The 2005 gain from property dispositions includes a gain of $46.2 million related to the sale of 130 Wendy’s real estate properties to a third party for $119.1 million.
Equity investments and other, net
Equity investments and other, net in 2006 includes equity income recorded in the fourth quarter from the Company’s 50/50 restaurant real estate joint venture with THI. Prior to the fourth quarter this joint venture was consolidated. Equity investments and other, net in 2005 and 2004 primarily includes equity losses from other equity investments held by the Company, legal reserves, including approximately $8 million in 2004 and other costs.
Interest Expense
The $7.4 million decrease in interest expense in 2006 versus 2005 primarily reflects the repayment of the Company’s $100 million, 6.35% Notes in December 2005. Interest expense in 2005 was $43.1 million and comparable to 2004 interest expense of $42.0 million.
Interest Income
The $33.9 million increase in interest income in 2006 versus 2005 primarily reflects interest earned on the funds received from THI after its IPO in late March, which also included borrowings by THI paid to the Company. Interest income only increased $1.5 million in 2005 as compared to 2004.
Income Taxes
The effective income tax rate for continuing operations for 2006 was 12.8% compared to 37.8% for 2005 and 39.8% for 2004. The rate for 2006 was favorably impacted by the resolution of the IRS audit for 2001 through 2004 along with audits for various states. Additionally, the rate in 2006 benefited from federal tax credits earned throughout the year for hiring employees in the Gulf Zone subsequent to Hurricane Katrina. The rate for 2005 compared to 2004 was favorably impacted by new state tax legislation enacted in the second quarter of 2005 and by Katrina-related credits earned in the fourth quarter of 2005.
Income (Loss) from Discontinued Operations
The Company completed its spin-off of THI on September 29, 2006 and completed its sale of Baja Fresh on November 28, 2006. During the fourth quarter 2006, the Company also approved the prospective sale of Cafe Express. Accordingly, the after-tax operating results of THI, Baja Fresh and Cafe Express appear in the “Discontinued Operations” line on the income statement for all years presented. Income (loss) from discontinued operations, net of tax, was $57.3 million, $139.0 million and $(54.1) million in 2006, 2005 and 2004, respectively. The results for 2006 include a Baja Fresh $46.9 million pretax goodwill impairment charge, $84.5 million and $9.2 million of Baja Fresh and Cafe Express pretax intangible and fixed asset impairment charges, respectively, and a tax benefit of $11.5 million to recognize the outside book versus tax basis differential on the sale of the stock of Baja Fresh. Also, the results from discontinued operations included only nine months of THI results in 2006 compared to a full year of THI results in 2005 and 2004. The results for 2005 include $25.4 million and $10.7 million of THI and Cafe Express pretax goodwill impairment charges, respectively, and $18.5 million and $4.0 million of pretax asset impairment charges of THI and Cafe Express, respectively. The 2004 results include $190.0 million in Baja Fresh pretax goodwill impairment charges and $21.7 million in pretax store closure and fixed asset impairment charges. See also Note 10 to the Consolidated Financial Statements.
COMPREHENSIVE INCOME
Comprehensive income was lower than net income by $16.0 million in 2006, and higher than net income by $12.1 million and $55.9 million in 2005 and 2004, respectively. The decrease in comprehensive income in 2006
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primarily includes a pension liability adjustment of $21.5 million, offset by $5.4 million in favorable translation adjustments. The increases in comprehensive income over net income in 2005 and 2004 primarily reflect favorable translation adjustments on the Canadian dollar.
FINANCIAL POSITION
Overview
The Company generates considerable cash flow each year from net income excluding depreciation and amortization. The main recurring requirement for cash is capital expenditures. In the last three years the Company has generated cash from continuing operating activities in excess of capital expenditure spending. The sale of properties has also provided significant cash to continuing operations over the last three years. Share repurchases are part of the ongoing financial strategy utilized by the Company, and normally these repurchases come from cash on hand and the cash provided by option exercises. In the fourth quarter of 2006, the Company also used approximately $800 million of funds received from THI after its IPO in late March to complete a “Dutch Auction” tender offer share repurchase. In the short term, the Company expects cash provided from option exercises and the cash used for share repurchases should decrease as the Company has not granted options over the last two years and only approximately 2 million options were outstanding as of December 31, 2006. The Company plans to begin granting options again in 2007 and intends to seek approval for a new equity award program at its 2007 shareholders’ meeting in April 2007. In February 2007, the Company announced its intention to increase its annual cash dividend from $0.34 per share to $0.50 per share beginning with the quarterly dividend to be paid May 2007. The Company currently has a $500 million shelf registration and $200 million line of credit which are unused as of December 31, 2006.
The Company maintains a strong balance sheet. Standard & Poor’s and Moody’s rate the Company’s senior unsecured debt BB+ and Ba2, respectively. The long-term debt-to-total equity ratio for the Company’s continuing operations increased to approximately 55% at year-end 2006 from approximately 26% at year-end 2005, primarily reflecting a $1.0 billion decline in equity in 2006 due to common share repurchases of $1.0 billion.
Total assets from continuing operations increased $0.1 million in 2006 to $2.1 billion. Net property and equipment decreased $0.1 million, primarily reflecting the sale and closure of certain restaurants and depreciation expense partially offset by new restaurant openings. Return on average assets was 2.9% in 2006 and 7.0% in 2005. The decrease reflects a reduction in net income. Return on average assets is computed as net income divided by average assets over the previous five quarters, excluding advertising fund restricted assets. Current advertising fund restricted assets are separately presented on the Company’s balance sheets. The Company is restricted from utilizing these assets for its own purposes. See also Note 14 of the Financial Statements and Supplementary Data included in Item 8 herein for further information.
Total shareholders’ equity decreased $1.0 billion in 2006 due primarily to common share repurchases. THI net IPO proceeds of $716.7 million increased shareholder’s equity, while shareholders’ equity was reduced by $638.9 million at the time of the spin-off of THI. Return on average equity, defined as net income divided by average equity over the previous five quarters, was 4.7% in 2006 and 11.9% in 2005.
Comparative Cash Flows
Cash flows from operations provided by continuing operations were $143.9 million, $190.8 million and $240.8 million for 2006, 2005 and 2004, respectively. The 2006 decrease was primarily due to tax benefits of $29.2 million related to equity award grants which were classified as financing activities versus operating activities in accordance with SFAS No. 123R “Share Based Payment” and higher working capital cash outflows in 2006 versus 2005. The 2005 decrease compared to 2004 was primarily related to lower net income, net of 2005 net gains from property dispositions.
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Cash flows from operations provided by discontinued operations were $127.5 million, $286.5 million and $261.6 million for 2006, 2005 and 2004, respectively. The 2006 decrease was primarily due to higher tax and interest payments of $30.1 million, 2006 foreign currency hedge payments of $28.0 million, and higher working capital cash outflows in 2006 versus 2005. The increase in 2005 over 2004 cash flows provided by discontinued operations includes higher earnings from THI.
Net cash used in investing activities from continuing operations totaled $62.6 million in 2006 compared to cash provided of $3.7 million in 2005 and cash used of $113.4 million in 2004. The $66.3 million difference between 2006 and 2005 primarily reflects a decrease in proceeds from property dispositions of $133.2 million primarily due to the 2005 sale of properties previously leased to franchisees, partially offset by lower 2006 capital expenditures of $71.8 million. The $117.1 million difference between 2005 and 2004 primarily reflects the higher proceeds from property dispositions of $138.9 million primarily due to the 2005 sale of properties previously leased to franchisees, partially offset by higher 2005 capital expenditures of $14.8 million Capital expenditures are the largest ongoing component of the Company’s investing activities and include expenditures for new restaurants, improvements to existing restaurants and other capital needs. A summary of continuing operations capital expenditures for the last three years follows.
|
Capital Expenditures (In millions) |
2006 | 2005 | 2004 | ||||||
|
New restaurants |
$ | 44 | $ | 101 | $ | 64 | |||
|
Restaurant improvements |
56 | 56 | 60 | ||||||
|
Other capital needs |
10 | 24 | 42 | ||||||
|
Total capital expenditures |
$ | 110 | $ | 181 | $ | 166 | |||
Net cash used in investing activities from discontinued operations totaled $88.3 million in 2006 compared to $190.9 million in 2005 and $209.1 million in 2004. The decrease in net cash used in 2006 primarily reflects a $76.5 million decrease in capital expenditures for new store development and higher development costs in 2005 for THI’s new distribution center and $25.0 million in net proceeds from the sale of Baja Fresh in 2006. The decrease in net cash used in 2005 versus 2004 primarily reflects $44.3 million in cash used by THI in 2004 to acquire Bess Eaton and $10.9 million in cash used by Baja Fresh for the acquisition of franchises in 2004. These cash flows were partially offset by a $24.7 million cash inflow received by THI in 2004 from the maturity of a short-term investment, and higher capital expenditures in 2005 versus 2004 of $15.4 million.
Net cash used in financing activities from continuing operations totaled $854.9 million in 2006 compared to $77.4 million in 2005 and $181.3 million in 2004. The $777.5 million increase in net cash used from continuing operations in 2006 compared to 2005 primarily reflects higher share repurchases of $925.4 million and $96.1 million in lower 2006 proceeds from employee exercises of stock options, partially offset by $94.0 million in proceeds from debt established through the sale of a portion of the Company’s royalty stream and 2005 net debt repayments of $124.3 million. The $103.9 million decrease in net cash used in financing activities from continuing operations in 2005 compared to 2004 primarily reflects higher 2005 proceeds from employee exercises of stock options of $184.5 million and lower share repurchases of $38.6 million, partially offset by higher debt repayments of $107.8 million. Dividends paid in 2005 increased $11.4 million due to a 12.5% increase in the dividend rate in the first quarter of 2005 and a 25% increase in the dividend rate in the third quarter of 2005.
Financing activities from discontinued operations provided $796.9 million in 2006 compared to a cash use of $0.1 million in 2005 and $2.4 million in 2004. The
increase in 2006 is primarily related to net proceeds of $716.8 million related to the THI IPO and THI proceeds from the issuance of debt. Offsetting these increases were higher net principal payments on debt obligations of $183.1 million, primarily
Liquidity and Capital Resources
Cash flow from continuing 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
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the Company’s projected short-term and long-term cash requirements, including cash for capital expenditures, potential share repurchases, dividends, repayment of debt, future acquisitions of restaurants from franchisees and other corporate purposes. In the past three years, cash provided by operating activities, borrowings, proceeds from stock options and other sources was used to primarily fund continued growth in restaurants, other capital expenditures, investments, dividend payments and repurchases of shares of common stock. In November 2006, the Company purchased 22.4 million of its common shares at a purchase price of $35.75 per share, for a total cost of $804.4 million by conducting a modified “Dutch Auction” tender offer. In the first quarter of 2006, the Company acquired 3.75 million shares in an accelerated share repurchase (“ ASR ”) for an initial value of $220.1 million or $58.64 per share. Cash used to acquire the shares in November 2006 was received from THI after its IPO in late March and included borrowings by THI paid to the Company.
The Company expects 2007 capital expenditures to be in the range of approximately $125 million to $155 million for new restaurant development, remodeling, maintenance and technology initiatives. In 2007, the Company plans to open new company operated and franchised restaurants which, in the aggregate, would total between 80 and 110 compared to 122 in 2006. Development in 2007 is expected to be concentrated in North America.
As in prior years, the Company may also invest in new business opportunities. In October 2004, the Company invested an additional $4 million in Pasta Pomodoro, bringing its investment at that time to approximately 29% on a fully diluted basis. The Company will evaluate other opportunities as they arise.
The Company used cash totaling $1.0 billion, $99.5 million and $138.1 million in 2006, 2005 and 2004, respectively, to repurchase common shares. Generally, the Company’s objective in its share repurchase program is to enhance shareholder value and offset the dilution impact of the Company’s equity compensation program. Since 1998 through the end of 2006, the Company has repurchased 68.6 million common and other shares exchangeable into common shares for approximately $2 billion. In the last five years, the Company has returned more than $2 billion to shareholders in the form of share repurchases and cash dividends.
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 a cash payment in 2006 of $94.0 million. Royalties subject to the agreement relate to royalties payable to a subsidiary of the Company for both company operated and franchised stores. The $94.0 million received in 2006 is classified as debt as of December 31, 2006. This recorded debt amount is expected to be repaid through May 2008 as royalties are received. The agreement related to this transaction will conclude in May 2008.
In February 2007, the Company announced that based on its strong cash position and strategic direction, it intended to increase its common stock dividend by 47%, from $0.34 to $0.50 annually, beginning with the May 2007 payment. The Company’s target for its dividend yield is 1.4% to 1.6%.
In 2004, the Company’s shareholders approved a new equity-based compensation program for directors and employees featuring restricted stock shares, restricted stock units and performance shares rather than stock options which had previously been used exclusively. This program will permit up to 3.6 million common shares to be issued. The Company has only issued restricted stock shares, restricted stock units and performance shares in 2006 and 2005 under this new plan. The 2004 program combined with significant option exercises over the last two years have reduced “overhang” (all approved but unexercised options and shares divided by shares outstanding plus all approved but unexercised options and shares). Other types of incentives could also be awarded under the program. The Company also intends to seek approval of a new equity-based compensation program at its 2007 shareholders meeting. The Company expects that approximately 50% of the value of equity awards made in 2007 and subsequent years will be comprised of stock options, with the remaining 50% of the value comprised of performance awards.
In 2003, the Company filed a shelf registration statement on Form S-3 with the SEC to issue up to $500 million of securities. On March 1, 2006, the Company entered into a new $200 million revolving credit facility, which
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expires on March 1, 2008 and which replaced the Company’s previous $200 million revolving credit facility entered into in 2003. 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. The Company is charged interest on advances that varies based on the type of advance utilized by the Company, which is either alternate base rate (greater of prime or Federal funds plus 0.5%) or a rate based on LIBOR plus a margin that varies based on the Company’s debt rating at the time of the advance. The Company is also charged a facility fee based on the total credit facility. This fee varies from 0.07% to 0.20% based on the Company’s debt rating. The Company’s Senior Notes and debentures also have limits on liens that can be placed on the Company’s assets and limits on sale leaseback transactions. As of December 31, 2006, the Company was in compliance with its covenants under the revolving credit facility and the limits of its Senior Notes and debentures. As of December 31, 2006, no amounts under the credit facility were drawn and all of the $500 million of securities available under the above-mentioned Form S-3 filing remained unused.
Standard & Poor’s and Moody’s rate the Company’s senior unsecured debt as BB+ and Ba2, respectively. The ratings were reduced in 2006 and are considered below investment grade. As a result, the Company could incur an increase in borrowing costs if it were to enter into new borrowing arrangements and can no longer access the capital markets through its commercial paper program. If the rating should continue to decline, it is possible that the Company would not be able to borrow on acceptable terms. Factors that could be significant to the determination of the Company’s credit ratings include, among other things, sales and cost trends, the Company’s cash position, cash flow, capital expenditures and stability of earnings.
The Company does not have significant term-debt maturities until 2011. The Company believes it will be able to pay or refinance its debt obligations as they become due based on its strong financial condition and sources of cash described above. The Company’s significant contractual obligations and commitments as of December 31, 2006 are shown in the following table. Purchase obligations primarily include commitments for advertising expenditures and purchases for certain food-related ingredients.
| Payments Due by Period | |||||||||||||||
|
Contractual Obligations (1) (In thousands) |
Less Than 1 Year |
1-3 Years | 3-5 Years |
After 5 Years |
Total | ||||||||||
|
Long-term debt, including interest and current maturities |
$ | 127,367 | $ | 83,189 | $ | 265,038 | $ | 454,422 | $ | 930,016 | |||||
|
Capital leases |
2,131 | 4,403 | 3,868 | 21,374 | 31,776 | ||||||||||
|
Operating leases |
58,063 | 110,878 | 90,373 | 705,925 | 965,239 | ||||||||||
|
Purchase obligations |
149,610 | 4,314 | 2,138 | 0 | 156,062 | ||||||||||
|
Total Contractual Obligations |
$ | 337,171 | $ | 202,784 | $ | 361,417 | $ | 1,181,721 | $ | 2,083,093 | |||||
| (1) | As of December 31, 2006, the Company’s pension plans were funded such that pension assets are approximately equal to the projected benefit obligation. The Company made contributions totaling approximately $2 million into its pension plans in 2006. Estimates of reasonably likely future pension contributions are heavily dependent on expectations about future events outside of the pension plans, such as future pension asset performance, future interest rates, future tax law changes and future changes in regulatory funding requirements. The Company estimates contributions to its pension plans in 2007 will not exceed $10 million, unless the Company would settle a significant portion of its pension liabilities related to the planned termination of its pension plans. It is possible future legislative changes could require significant future contributions. Certain executive employees are also eligible to participate in the Company’s supplemental executive retirement plan. Under this plan, each participating employee’s account reflects amounts credited by the Company based on the employee’s earnings plus or minus investment gains and losses of specified investments in which amounts credited by the Company are deemed to be invested. The supplemental executive retirement plan is not funded, but account balances of approximately $14 million, which are included in other long-term liabilities on the Consolidated Balance Sheet as of December 31, 2006, are payable to participating employees when they retire or otherwise are no longer employed by the Company. Estimates of reasonably likely future payments by the Company under the supplemental executive retirement plan are heavily dependent on future events outside of this plan, such as the timing of participating employees leaving the Company, the performance of the investments and the time period over which employees elect to receive distributions from the supplemental executive retirement plan. Due to the significant uncertainties regarding future pension fund contributions and payments under the Company’s supplemental executive retirement plan, no pension fund contributions or supplemental executive retirement plan payments are included in the table. In addition, the Company also has liabilities for income taxes, however the timing or amounts for periods beyond 2006 cannot be determined. |
29
|
Other Commercial Commitments (In thousands) |
As of December 31, 2006 |
||
|
Franchisee lease and loan guarantees |
$ | 171,310 | |
|
Contingent rent on leases |
21,277 | ||
|
Letters of credit |
6,736 | ||
|
Total Other Commercial Commitments |
$ | 199,323 | |
The Company has guaranteed certain leases and debt payments, primarily related to franchisees, amounting to $171.3 million for the continuing Wendy’s business. In the event of default by a franchise owner, the Company generally retains the right to acquire possession of the related restaurants. The Company is contingently liable for certain leases for the continuing Wendy’s business amounting to an additional $21.3 million. These leases have been assigned to unrelated third parties, who have agreed to indemnify the Company against future liabilities arising under the leases. These leases expire on various dates through 2022. The Company is also the guarantor on $6.7 million in letters of credit with various parties for the continuing Wendy’s business, 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 accordance with Financial Accounting Standards Board Interpretation (“ FIN ”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” and based on available information, the Company has accrued for certain guarantees and indemnities as of December 31, 2006 and January 1, 2006, in amounts which, in total, are not material.
At December 31, 2006 and January 1, 2006, the Company’s reserves established for doubtful royalty receivables were $3.1 million and $3.1 million, respectively. Reserves related to possible losses on notes receivable, real estate, guarantees, claims and contingencies involving franchisees totaled $7.4 million and $7.4 million at December 31, 2006 and January 1, 2006, respectively. These reserves are included in accounts receivable, notes receivable and other accrued expenses.
MANAGEMENT’S OUTLOOK
New Comprehensive Plan to Focus on the Wendy’s Brand
In October 2006, the Company announced a new plan to drive restaurant-level economic performance focused on product innovation, targeted marketing and operations excellence. Components include:
| • |
Revitalize Wendy’s Core Brand —The Company will re-focus on its brand essence, “Quality Made Fresh,” centered on Wendy’s core strength, its hamburger business. |
| • |
Streamline and improve operations —Includes a new restaurant services group to improve system-wide restaurant operations standards, while emphasizing improved store profits and operating margins. |
| • |
Reclaim Innovation Leadership —Development of new products that reinforce Wendy’s “Quality Made Fresh” brand essence and drive new consumers to its restaurants. The Company believes its new product pipeline is now robust. |
| • |
Investing approximately $60 million per year over the next five years into the upgrade and renovation of its company-operated restaurants. |
| • |
Strengthen Franchisee Commitment —Providing up to $25 million per year of incentives to franchisees for reinvestments in their restaurants over the next five years, and require franchisees to meet store remodel standards. |
| • |
Selling up to 50 in 2007 and targeting to sell up to 300 to 400 of its company operated restaurants to franchisees beginning in 2008, while improving store level profitability first. |
| • |
Capture New Opportunities —Seeking to drive growth beyond its existing business. The Company is expanding breakfast and is following a disciplined process for product development and operations, as |
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|
well as analyzing consumer feedback. With the QSR breakfast market estimated at $30 billion, breakfast is a high priority for the Company that could generate significant sales and profits. Also, the Company believes it has considerable opportunity to expand in the U.S. over the long-term and is making infrastructure investments to grow its International business. The Company will continue to moderate its short-term North American development until restaurant revenues and operating cash flows improve. |
| • |
Embrace a Performance-Driven Culture —A redesign of its incentive compensation plan to drive future performance to better reward individual employee performance and to better align compensation with business performance in the short and longer term. |
| • |
Maintaining its strong corporate culture based on the values established by Wendy’s founder Dave Thomas. |
Authorization of up to 35.4 million shares for repurchase
In October 2006, the Company’s Board of Directors approved a share repurchase program of up to 35.4 million shares to be implemented over the next 18 to 24 months. The Company utilized the majority of this authorization by conducting a modified “Dutch Auction” tender offer under which in the fourth quarter of 2006 it purchased 22.4 million common shares at a purchase of $35.75. The Company purchased the shares tendered in the offer using existing cash on its balance sheet. As a result, as of December 31, 2006 13.0 million shares remained under the Board of Directors authorization.
On February 20, 2007, the Company announced it had entered into an ASR transaction with a broker-dealer to purchase up to $300 million of its common shares. The common shares purchased will be placed into treasury to be used for general corporate purposes. The number of shares that the Company may repurchase pursuant to the ASR will not be known until conclusion of the transaction, which is expected to occur during the Company’s first quarter; however, the Company expects to repurchase up to approximately 9 million shares. The price per share to be paid by the Company will be determined by reference to the weighted average price per share actually paid by the broker-dealer to purchase shares during a hedge period expected to be approximately one month, subject to a cap and a floor. The ASR agreement includes the option to settle the contract in cash or shares of the Company’s common stock and, accordingly, the contract will be classified in equity.
2007 Guidance
In February 2007, the Company reaffirmed its 2007 guidance of $330 to $340 million in continuing net income earnings before interest, taxes depreciation and amortization (“ EBITDA ”) based on operating income of $215 million to $225 million and depreciation of $115 million. EBITDA is used by management as a performance measure for benchmarking against its peers and competitors. The Company believes EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties to evaluate companies in the restaurant industry. Also included as part of the Company’s February 2007 guidance for the 2007 year was:
| • |
Annual revenue growth of approximately 5% to 6%. |
| • |
Same-store sales growth in a range of 3% to 4%, excluding the impact of breakfast. |
| • |
A 390 to 410 basis-point improvement in store operations margins in a range of 12.8% to 13.0% in 2007 from a base of 8.9% in 2006. |
| • |
General and administrative expenses in the range of 8.75% to 9.25% due to realization of previously announced cost reduction efforts. |
| • |
A steady expansion of a breakfast offering, with a goal of reaching breakeven in the day-part during 2007. |
| • |
An effective tax rate of approximately 39.0%. |
| • |
Opportunistic share repurchases roughly offsetting dilution. |
| • |
Earnings per share from continuing operations of $1.17 to $1.23 |
Ongoing Initiatives
The Company continues to implement its strategic initiatives. These initiatives include leveraging the Company’s core assets, growing average same-store sales, improving store-level productivity to enhance margins, improving
31
underperforming operations, developing profitable new restaurants and implementing new technology initiatives. Management intends to allocate resources to improve returns on assets and invested capital, and monitor its progress by tracking various metrics, including return on average assets, return on average equity and return on invested capital, as well as comparing to historical performance, the Company’s peers and other leading companies.
The Company also continues to focus on its dividend policy, continued share repurchases, an equity-based compensation program for employees and directors and stock ownership guidelines for Company officers to hold Company stock, in-the-money stock options and other equity awards equal to their annual base salary, and the named executive officers, as established in the proxy statement, to hold Company stock, in-the-money stock options and other equity awards equal to three times their annual base salary.
The Company intends to remain focused on established long-term operational strategies of exceeding customer expectations, fostering a performance-driven culture, delivering a balanced message of brand equity plus value in marketing and growing a healthy restaurant system. The Company believes its success depends on providing everyday value, quality and variety, not price discounting. As a result, the Company provides a variety of menu choices and will continue to evaluate and introduce new products to meet the trends and desires of its customers. Management believes in reinvesting in its restaurants to maintain a fresh image, providing convenience for its customers and increasing the overall efficiency of restaurant operations. The goal of these strategies is to increase average sales over time, primarily through greater customer traffic in the restaurants. The Company intends to effectively manage corporate and field-level costs to control overall general and administrative expense.
New restaurant development will continue to be an important opportunity to the Company. Wendy’s is under penetrated in key markets. The Company intends to grow responsibly, focusing on the markets with the best potential for sales and return on investment. A total of 122 new restaurants were opened in 2006. Current plans call for a total of 80 to 110 new company and franchise restaurant units to open in 2007. The primary focus will be on core operations of Wendy’s in North America, with the majority of units being standard sites.
Another element of the Company’s strategic plan is the evaluation of potential acquisitions of franchised restaurants, the sale of company stores to franchisees and vertical integration opportunities that could add to the Company’s long-term earnings growth.
Off-Balance Sheet Arrangements
The Company has no “off-balance sheet” arrangements as of December 31, 2006 and January 1, 2006 as that term is described by the SEC.
Revenue Recognition
Wendy’s has a significant number of company operated restaurants at which revenue is recognized as customers pay for products at the time of sale. Franchise revenues consist of royalties, rents, gains from the sales of properties to franchisees, and various franchise fees. Royalty revenues are normally collected within two months after a period ends. The timing of revenue recognition for both retail sales and franchise revenues does not involve significant contingencies and judgments other than providing adequate reserves against collections of franchise-related revenues.
The Application of Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make assumptions and estimates that can have a material impact on
32
the results of operations of the Company. The earnings reporting process is covered by the Company’s system of internal controls, and generally does not require significant management estimates and judgments. However, estimates and judgments are inherent in the calculations of royalty and other franchise-related revenue collections, legal obligations, pension and other postretirement benefits, income taxes, insurance liabilities, various other commitments and contingencies, valuations used when assessing potential impairment of goodwill, other intangibles and other long lived assets and the estimation of the useful lives of fixed assets and other long-lived assets. While management applies its judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would be reported using different assumptions.
The Company collects royalties, and in some cases rent, from franchisees. The Company provides for estimated losses for revenues that are not likely to be collected. Although the Company generally enjoys a good relationship with franchisees, and collection rates are currently very high, if average sales or the financial health of franchisees were to deteriorate, the Company might have to increase reserves against collection of franchise revenues.
The Company is self-insured for most domestic workers’ compensation, health care claims, general liability and automotive liability losses. The Company records its insurance liabilities based on historical and industry trends, which are continually monitored, and accruals are adjusted when warranted by changing circumstances. Outside actuaries are used to assist in estimating casualty insurance obligations. Since there are many estimates and assumptions involved in recording insurance liabilities, differences between actual future events and prior estimates and assumptions could result in adjustments to these liabilities. Workers’ compensation insurance can particularly involve significant time before the ultimate resolution of claims. Wendy’s had accrued $47.3 million and $43.4 million at year-end 2006 and 2005, respectively, for domestic workers’ compensation liabilities, domestic general liability, domestic automotive liability and other property liabilities. In Canada, workers’ compensation benefits are part of a government-sponsored plan and although the Company and its employees make contributions to that plan, management is not involved in determining these amounts.
Pension and other retirement benefits, including all relevant assumptions required by generally accepted accounting principles, are evaluated each year with the oversight of the Company’s retirement committee. Due to the technical nature of retirement accounting, outside actuaries are used to provide assistance in calculating the estimated future obligations. Market interest rates are reviewed to establish pension plan discount rates and expected returns on plan assets are based on the mix of investments and expected market returns. Since there are many estimates and assumptions involved in retirement benefits, differences between actual future events and prior estimates and assumptions could result in adjustments to pension expenses and obligations. If the Company were to change its discount rate by 0.25%, this would change annual pension costs by $0.2 million. If the Company were to change its long-term return on assets rate by 0.25%, this would change annual pension costs by $0.3 million.
In the normal course of business, the Company must make continuing estimates of potential future legal obligations and liabilities, which requires the use of management’s judgment on the outcome of various issues. Management may also use outside legal advice to assist in the estimating process. However, the ultimate outcome of various legal issues could be different than management estimates, and adjustments to income could be required.
The Company records income tax liabilities utilizing known obligations and estimates of potential obligations. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carryforwards. When considered necessary, the Company records a valuation allowance to reduce deferred tax assets to the balance that is more likely than not to be realized. Management must make estimates and judgments on future taxable income, considering feasible tax planning strategies and taking into account existing facts and circumstances, to determine the proper valuation allowance. When the Company determines that deferred tax assets could be realized in greater or lesser amounts than recorded, the asset balance and income statement reflects the change in the period such determination is made.
33
Due to changes in facts and circumstances and the estimates and judgments that are involved in determining the proper valuation allowance, differences between actual future events and prior estimates and judgments could result in adjustments to this valuation allowance. The Company uses an estimate of its annual effective tax rate at each interim period based on the facts and circumstances available at that time while the actual effective tax rate is calculated at year-end. Depreciation and amortization are recognized using the straight-line method in amounts adequate to amortize costs over the following estimated useful lives: buildings and leasehold improvements and property under capital leases, the lesser of the useful life of the asset (up to 40 years) or the lease term, as that term is defined in SFAS No. 13, “Accounting for Leases”, as amended; restaurant equipment, up to 15 years; and other equipment, up to 10 years. The Company estimates useful lives on buildings and equipment based on historical data and industry trends. The Company capitalizes certain internally developed software costs which are amortized over a period of up to 10 years. The Company monitors its capitalization and amortization policies to ensure they remain appropriate. Intangibles separate from goodwill are amortized on a straight-line basis over periods of up to 30 years. Lives may be related to legal or contractual lives, or must be estimated by management based on specific circumstances.
Long-lived assets are grouped into operating markets and tested for impairment whenever an event occurs that indicates that an impairment may exist. The Company tests for impairment using the cash flows of the operating markets. A significant deterioration in the cash flows of an operating market or other circumstances may trigger impairment testing. If an impairment is indicated, the fair value of the fixed assets is estimated using the discounted cash flows or third party appraisals of the operating market. The interest rate used in preparing discounted cash flows is management’s estimate of the weighted average cost of capital. The Company tests goodwill for impairment annually (or in interim periods if events or changes in circumstances indicate that its carrying amount may not be recoverable) by comparing the fair value of each reporting unit, as measured by discounted cash flows and market multiples based on earnings, to the carrying value to determine if there is an indication that a potential impairment may exist. One of the most significant assumptions is the projection of future sales. The Company reviews its assumptions each time goodwill is tested for impairment and makes appropriate adjustments, if any, based on facts and circumstances available at that time. In the fourth quarter of 2006, the Company tested goodwill for impairment and determined that no impairment was required.
Prior to January 2, 2006, the Company used 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”. Accordingly, because stock options granted prior to January 2, 2006 had no intrinsic value at date of grant, compensation expense related to stock options was recognized using the Black-Scholes method only when stock option awards were modified after the grant date. During the fourth quarter of 2005, the Company accelerated the vesting of all outstanding options, excluding those held by outside directors of the Company. Prior to January 2, 2006, compensation expense recognized related to restricted shares was measured based on the market value of the Company’s common stock on the date of grant. The Company generally satisfies share-based exercises and vesting through the issuance of authorized but previously unissued shares of Company stock. Restricted shares are generally net-settled with new Company shares withheld, and not issued, to meet the employee’s minimum statutory withholding tax requirements.
On January 2, 2006, the Company adopted SFAS No. 123R “Share-Based Payment”, which requires share-based compensation cost to be recognized based on the grant date estimated fair value of each award, net of estimated cancellations, over the employee’s requisite service period, which is generally the vesting period of the equity grant. The Company elected to adopt SFAS No. 123R using the modified prospective method, which requires compensation expense to be recorded for all unvested share-based awards beginning in the first quarter of adoption. Accordingly, the prior periods presented in this Form 10-K have not been restated to reflect the fair value method of expensing stock options. Also, because the value used to measure compensation expense for restricted shares is the same for APB Opinion No. 25 and SFAS No. 123R and because substantially all of the Company’s stock option grants were fully vested prior to January 2, 2006, the adoption of SFAS No. 123R did not have a material impact on the Company’s operating income, pretax income or net income. The adoption did require the Company to classify $29.2 million in tax benefits as a financing activity versus an operating activity in the Consolidated Statements of Cash Flows.
34
WENDY’S INTERNATIONAL, INC. AND SUBSIDIARIES
SYSTEMWIDE RESTAURANTS
|
As of
December 31, 2006 |
As of
October 1, 2006 |
Increase/
(Decrease) From Prior Quarter |
As of
January 2, 2006 |
Increase/
(Decrease) From Prior Year |
||||||||
|
Wendy’s |
||||||||||||
|
U.S. |
||||||||||||
|
Company |
1,317 | 1,320 | (3 | ) | 1,345 | (28 | ) | |||||
|
Franchise |
4,638 | 4,692 | (54 | ) | 4,673 | (35 | ) | |||||
| 5,955 | 6,012 | (57 | ) | 6,018 | (63 | ) | ||||||
|
Canada |
||||||||||||
|
Company |
146 | 148 | (2 | ) | 152 | (6 | ) | |||||
|
Franchise |
231 | 231 | 0 | 225 | 6 | |||||||
| 377 | 379 | (2 | ) | 377 | 0 | |||||||
|
Other International |
||||||||||||
|
Company |
2 | 5 | (3 | ) | 5 | (3 | ) | |||||
|
Franchise |
339 | 345 | (6 | ) | 346 | (7 | ) | |||||
| 341 | 350 | (9 | ) | 351 | (10 | ) | ||||||
|
Total Wendy’s |
||||||||||||
|
Company |
1,465 | 1,473 | (8 | ) | 1,502 | (37 | ) | |||||
|
Franchise |
5,208 | 5,268 | (60 | ) | 5,244 | (36 | ) | |||||
| 6,673 | 6,741 | (68 | ) | 6,746 | (73 | ) |
Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board (“ FASB ”) issued Statement of Financial Accounting Standards (“ SFAS ”) No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of SFAS Nos. 87, 88, 106, and 132(R)”. This statement requires the recognition of the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its consolidated balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This statement also requires the measurement of the funded status of a plan as of the date of the year-end consolidated balance sheet and disclosure in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. This statement is effective for fiscal years ending after December 15, 2006. As a result of SFAS No. 158, the Company reduced both the prepaid pension asset and the long-term pension liability by $34.0 million.
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 creates consistency and comparability in fair value measurements among the many accounting pronouncements that require fair value measurements but does not require any new fair value measurements. This Statement is effective for fiscal years beginning after November 15, 2006. The adoption of SFAS No. 157 is not expected to have a material impact on the Company’s financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin (“ SAB ”) No. 108 expressing the staff’s views regarding the process of quantifying financial statement misstatements. The staff believes that in making
35
materiality evaluations of correcting a financial statement misstatement, management should quantify the carryover and reversing effects of prior year misstatements on the current year financial statements. The cumulative effect of the initial application, if any, should be reported in the carrying amount of assets and liabilities as of the beginning of the fiscal year and the offsetting adjustment to the opening balance of retained earnings. This SAB is effective for fiscal years ending after November 15, 2006. The adoption of SAB No. 108 did not have a material impact on the Company’s financial statements.
In July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes”, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes”. An uncertain tax position will be recognized if it is determined that it is more likely than not to be sustained upon examination. The tax position is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The cumulative effect of applying the provisions of this Interpretation is to be reported as a separate adjustment to the opening balance of retained earnings in the year of adoption. This statement is effective for fiscal years beginning after December 15, 2006. Upon adoption, management estimates that there will not be a significant adjustment to retained earnings for a change in reserves for uncertain tax positions and is in the process of finalizing its analysis.
Safe Harbor Statement
Certain information contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, 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; risk inherent to international development (including currency fluctuations); the continued ability of the Company and its franchisees to obtain suitable locations and financing for new restaurant development; governmental initiatives such as minimum wage rates, taxes and possible franchise legislation; changes in applicable accounting rules; the ability of the Company to successfully complete transactions designed to improve its return on investment; or other factors set forth in Item 1A and Exhibit 99 hereto.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Inflation
Financial statements determined on a historical cost basis may not accurately reflect all the effects of changing prices on an enterprise. Several factors tend to reduce the impact of inflation for the Company. Inventories approximate current market prices, there is some ability to adjust prices and liabilities are repaid with dollars of reduced purchasing power.
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 impact of foreign exchange rates on the Company’s income statement is predominately related to Canadian Wendy’s operations, since exposure outside of North America is limited to royalties paid by franchisees. The exposure to Canadian dollar exchange rates on the Company’s 2006 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, cash flows between the Canadian and U.S. dollar currencies were in excess of $200 million in 2005. After the spin-off of THI, the Company’s exposure to Canadian dollar foreign currency risk is not material.
36
The Company seeks to manage its cash flows 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 flows 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 flows. The Company has a policy forbidding trading or speculating in foreign currency and does not hedge foreign currency translation. In accordance with SFAS No. 133, the Company defers unrealized gains and losses arising from foreign currency derivatives until the impact of the related transactions occur. Fair values are determined from quoted market prices.
At the 2006 level of annual operating income generated from Canada, if the Canadian currency rate changes U.S. $0.05, or 4% compared to the average 2006 exchange rate, for an entire year, the annual impact on the Company’s diluted EPS would be less than one-half cent per share. At current royalty levels outside of North America, if all foreign currencies moved 10% during each royalty collection period in the same direction, at the same time, the annual impact on the Company’s diluted EPS would be approximately one-half cent per share. The Company has not hedged its exposure to currency fluctuations related to royalty collections outside North America because it does not believe the risk is material.
Interest Rate Risk
The Company’s debt is denominated in U.S. dollars, at fixed interest rates. The Company is exposed to interest rate risk impacting its net borrowing costs. The Company may seek 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 entered into an interest rate swap in 2003, effectively converting some of its fixed interest rate debt to variable interest rates. By entering into the interest rate swap, the Company agreed, at specified intervals, to receive interest at a fixed rate of 6.35% and pay interest based on the floating LIBOR-BBA interest rate, both of which are computed based on the agreed-upon notional principal amount of $100.0 million. The Company does not enter into speculative swaps or other financial contracts. The interest rate swap matured in December 2005 and met 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 were completely offset against gains or losses of the underlying debt obligation.
Commodity Risk
The Company purchases certain products in the normal course of business, which are affected by commodity prices. Therefore, the Company is exposed to some price volatility related to weather and various other market conditions outside the Company’s control. However, the Company employs various purchasing and pricing contract techniques in an effort to minimize volatility. Generally these techniques can include setting fixed prices with suppliers generally for one year, setting in advance the price for products to be delivered in the future (sometimes referred to as “buying forward”), and unit pricing based on an average of commodity prices over a period of time. The Company has not used financial instruments to hedge commodity prices, partly because of the contract pricing utilized. While price volatility can occur, which would impact profit margins, there are generally alternative suppliers available and, if the pricing problem is prolonged, the Company has some ability to increase selling prices to offset a rise in commodity price increases.
In instances such as reported cases of “mad cow disease” and illnesses from the E. coli bacteria, it is possible the Company may be exposed to risks other than price risk. The recent reported cases of “mad cow disease” and illnesses from the E. coli bacteria in North America, however, did not significantly impact the Company’s sales or earnings. There can be no assurance, however, that a future case of “mad cow disease” or illness from the E. coli bacteria or another food-borne illness would not have a significant impact on the Company’s sales and earnings.
37
Concentration of Credit Risk
The Company has cash balances in various domestic bank accounts above the Federal Deposit Insurance Corporation (“FDIC”) guarantee limits. The Company subscribes to a bank rating system and only utilizes high-grade banks for accounts that might exceed these limits. At year-end 2006, the amount in domestic bank accounts above FDIC limits was approximately $30 million.
| Item 8. | Financial Statements and Supplementary Data |
Management’s Statement of Responsibility for Financial Statements and Report on Internal Control Over Financial Reporting
Financial Statements
Management is responsible for preparation of the consolidated financial statements and other related financial information included in this annual report on Form 10-K. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, incorporating management’s reasonable estimates and judgments, where applicable.
Management’s Report on Internal Control Over Financial Reporting
This report is provided by management pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the SEC rules promulgated thereunder. Management is responsible for establishing and maintaining adequate internal control over financial reporting and for assessing the effectiveness of internal control over financial reporting.
The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and Directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the Company’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the assessment of the Company’s internal control over financial reporting, management has concluded that, as of December 31, 2006, the Company’s internal control over financial reporting was effective.
The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, as stated in their report which follows.
38
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Wendy’s International, Inc.:
We have completed integrated audits of Wendy’s International, Inc.’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) and (2) present fairly, in all material respects, the financial position of Wendy’s International, Inc. and its subsidiaries at December 31, 2006 and January 1, 2006, and the results of their operations and their cash flows for the three years ended December 31, 2006, January 1, 2006, and January 2, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule appearing under Item 15(c) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, effective January 2, 2006, the Company changed the manner in which it accounts for share-based compensation. In addition, as discussed in Note 13, the Company changed the manner in which it records the funded status of its defined benefit pension plans in 2006.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 8, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
39
accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Columbus, Ohio
March 1, 2007
40
Wendy’s International, Inc. and Subsidiaries—Consolidated Statements of Income
| Years ended December 31, 2006, January 1, 2006 and January 2, 2005 | ||||||||||||
| (In thousands, except per share data) | 2006 | 2005 | 2004 | |||||||||
|
Revenues |
||||||||||||
|
Sales |
$ | 2,154,607 | $ | 2,138,365 | $ | 2,194,031 | ||||||
|
Franchise revenues |
284,670 | 317,053 | 308,127 | |||||||||
|
Total revenues |
2,439,277 | 2,455,418 | 2,502,158 | |||||||||
|
Costs and expenses |
||||||||||||
|
Cost of sales |
1,352,312 | 1,362,631 | 1,369,509 | |||||||||
|
Company restaurant operating costs |
602,298 | 581,869 | 577,294 | |||||||||
|
Operating costs |
46,674 | 20,419 | 21,058 | |||||||||
|
Depreciation of property and equipment |
122,636 | 127,998 | 109,712 | |||||||||
|
General and administrative expenses |
237,575 | 220,891 | 210,156 | |||||||||
|
Other expense (income), net |
37,468 | (34,263 | ) | (1,329 | ) | |||||||
|
Total costs and expenses |
2,398,963 | 2,279,545 | 2,286,400 | |||||||||
|
Operating income |
40,314 | 175,873 | 215,758 | |||||||||
|
Interest expense |
(35,711 | ) | (43,076 | ) | (42,006 | ) | ||||||
|
Interest income |
37,876 | 3,987 | 2,438 | |||||||||
|
Income from continuing operations before income taxes |
42,479 | 136,784 | 176,190 | |||||||||
|
Income taxes |
5,433 | 51,689 | 70,046 | |||||||||
|
Income from continuing operations |
37,046 | 85,095 | 106,144 | |||||||||
|
Income (loss) from discontinued operations |
57,266 | 138,972 | (54,109 | ) | ||||||||
|
Net income |
$ | 94,312 | $ | 224,067 | $ | 52,035 | ||||||
|
Basic earnings per common share from continuing operations |
$ | 0.33 | $ | 0.74 | $ | 0.93 | ||||||
|
Diluted earnings per common share from continuing operations |
$ | 0.32 | $ | 0.73 | $ | 0.92 | ||||||
|
Basic earnings (loss) per common share from discontinued operations |
$ | 0.50 | $ | 1.21 | $ | (0.47 | ) | |||||
|
Diluted earnings (loss) per common share from discontinued operations |
$ | 0.50 | $ | 1.19 | $ | (0.47 | ) | |||||
|
Basic earnings per common share |
$ | 0.83 | $ | 1.95 | $ | 0.46 | ||||||
|
Diluted earnings per common share |
$ | 0.82 | $ | 1.92 | $ | 0.45 | ||||||
|
Dividends declared and paid per common share |
$ | 0.60 | $ | 0.58 | $ | 0.48 | ||||||
|
Basic shares |
114,244 | 114,945 | 113,832 | |||||||||
|
Diluted shares |
115,325 | 116,819 | 115,685 | |||||||||
See accompanying Notes to the Consolidated Financial Statements.
41
Wendy’s International, Inc. and Subsidiaries—Consolidated Balance Sheets
| December 31, 2006 and January 1, 2006 | ||||||||
| (Dollars in thousands) | 2006 | 2005 | ||||||
|
Assets |
||||||||
|
Current assets |
||||||||
|
Cash and cash equivalents |
$ | 457,614 | $ | 230,560 | ||||
|
Accounts receivable, net |
84,841 | 62,190 | ||||||
|
Deferred income taxes |
29,651 | 23,847 | ||||||
|
Inventories and other |
30,252 | 29,798 | ||||||
|
Advertising fund restricted assets |
36,207 | 35,651 | ||||||
|
Assets held for disposition |
15,455 | 65,693 | ||||||
|
Current assets of discontinued operations |
2,712 | 308,827 | ||||||
|
Total current assets |
656,732 | 756,566 | ||||||
|
Property and equipment, net |
1,226,328 | 1,348,474 | ||||||
|
Goodwill |
85,353 | 81,875 | ||||||
|
Deferred income taxes |
4,316 | 2,855 | ||||||
|
Intangible assets, net |
3,855 | 4,843 | ||||||
|
Other assets |
82,738 | 77,097 | ||||||
|
Non current assets of discontinued operations |
1,025 | 1,168,608 | ||||||
|
Total assets |
$ | 2,060,347 | $ | 3,440,318 | ||||
|
Liabilities and Shareholders’ Equity |
||||||||
|
Current liabilities |
||||||||
|
Accounts payable |
$ | 93,465 | $ | 92,340 | ||||
|
Accrued expenses |
||||||||
|
Salaries and wages |
47,329 | 34,871 | ||||||
|
Taxes |
46,138 | 60,984 | ||||||
|
Insurance |
57,353 | 58,147 | ||||||
|
Other |
32,199 | 34,079 | ||||||
|
Advertising fund restricted liabilities |
28,568 | 35,651 | ||||||
|
Current portion of long-term obligations |
87,396 | 2,497 | ||||||
|
Current liabilities of discontinued operations |
2,218 | 264,783 | ||||||
|
Total current liabilities |
394,666 | 583,352 | ||||||
|
Long-term obligations |
||||||||
|
Term debt |
537,139 | 521,800 | ||||||
|
Capital leases |
18,963 | 18,336 | ||||||
|
Total long-term obligations |
556,102 | 540,136 | ||||||
|
Deferred income taxes |
30,220 | 72,188 | ||||||
|
Other long-term liabilities |
66,163 | 68,017 | ||||||
|
Non current liabilities of discontinued operations |
1,519 | 118,036 | ||||||
|
Commitments and contingencies |
||||||||
|
Shareholders’ equity |
||||||||
|
Preferred stock, Authorized: 250,000 shares |
||||||||
|
Common stock, $.10 stated value per share, Authorized: 200,000,000 shares, Issued: 129,548,000 and 125,490,000 shares, respectively |
12,955 | 12,549 | ||||||
|
Capital in excess of stated value |
1,089,825 | 405,588 | ||||||
|
Retained earnings |
1,241,489 | 1,858,743 | ||||||
|
Accumulated other comprehensive income (expense): |
||||||||
|
Cumulative translation adjustments |
9,100 | 115,252 | ||||||
|
Pension liability |
(22,546 | ) | (1,096 | ) | ||||
| 2,330,823 | 2,391,036 | |||||||
|
Treasury stock, at cost: 33,844,000 and 7,681,000 shares, respectively |
(1,319,146 | ) | (294,669 | ) | ||||
|
Unearned compensation – restricted stock |
0 | (37,778 | ) | |||||
|
Total shareholders’ equity |
1,011,677 | 2,058,589 | ||||||
|
Total liabilities and shareholders’ equity |
$ | 2,060,347 | $ | 3,440,318 | ||||
See accompanying Notes to the Consolidated Financial Statements.
42
Wendy’s International, Inc. and Subsidiaries—Consolidated Statements of Cash Flows
| Years ended December 31, 2006, January 1, 2006 and January 2, 2005 | ||||||||||||
| (In thousands) | 2006 | 2005 | 2004 | |||||||||
|
Cash flows from operating activities |
||||||||||||
|
Income from continuing operations |
$ | 37,046 | $ | 85,095 | $ | 106,144 | ||||||
|
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||||||
|
Depreciation and amortization |
123,700 | 129,000 | 110,839 | |||||||||
|
Deferred income taxes |
(31,781 | ) | (12,475 | ) | (1,018 | ) | ||||||
|
(Gain) loss from property dispositions, net |
14,800 | (48,060 | ) | (5,886 | ) | |||||||
|
Equity based compensation expense |
11,413 | 16,194 | 3,802 | |||||||||
|
Tax benefit on the exercise of stock options |
29,189 | 37,872 | 6,155 | |||||||||
|
Excess stock-based compensation tax benefits |
(29,189 | ) | 0 | 0 | ||||||||
|
Net reserves for receivables and other contingencies |
635 | (81 | ) | 5,867 | ||||||||
|
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions of restaurants |
||||||||||||
|
Accounts and notes receivable |
(23,386 | ) | (1,984 | ) | (4,818 | ) | ||||||
|
Inventories and other |
(2,000 | ) | (4,607 | ) | (8,640 | ) | ||||||
|
Accounts payable and accrued expenses |
(3,710 | ) | (15,956 | ) | 16,309 | |||||||
|
Increase in other assets |
(1,038 | ) | (5,097 | ) | 2,506 | |||||||
|
Other, net |
18,227 | 10,916 | 9,513 | |||||||||
|
Net cash provided by operating activities from continuing operations |
143,906 | 190,817 | 240,773 | |||||||||
|
Net cash provided by operating activities from discontinued operations |
127,473 | 286,460 | 261,581 | |||||||||
|
Net cash provided by operating activities |
271,379 | 477,277 | 502,354 | |||||||||
|
Cash flows from investing activities |
||||||||||||
|
Proceeds from property dispositions |
62,885 | 196,036 | 57,134 | |||||||||
|
Capital expenditures |
(109,533 | ) | (181,302 | ) | (166,499 | ) | ||||||
|
Acquisition of franchises |
(13,263 | ) | (13,251 | ) | (5,601 | ) | ||||||
|
Principal payments on notes receivable |
514 | 9,838 | 6,463 | |||||||||
|
Investments in joint ventures and other investments |
(1,701 | ) | (2,420 | ) | (5,888 | ) | ||||||
|
Other investing activities |
(1,540 | ) | (5,216 | ) | 963 | |||||||
|
Net cash provided by (used in) investing activities from continuing operations |
(62,638 | ) | 3,685 | (113,428 | ) | |||||||
|
Net cash used in investing activities from discontinued operations |
(88,279 | ) | (190,898 | ) | (209,058 | ) | ||||||
|
Net cash used in investing activities |
(150,917 | ) | (187,213 | ) | (322,486 | ) | ||||||
|
Cash flows from financing activities |
||||||||||||
|
Proceeds from issuance of debt |
127,973 | 0 | 25,000 | |||||||||
|
Proceeds from employee stock options exercised |
119,846 | 215,938 | 31,436 | |||||||||
|
Excess stock-based compensation tax benefits |
29,189 | 0 | 0 | |||||||||
|
Repurchase of common stock |
(1,024,963 | ) | (99,545 | ) | (138,132 | ) | ||||||
|
Principal payments on debt |
(37,306 | ) | (127,675 | ) | (44,864 | ) | ||||||
|
Dividends paid on common shares |
(69,667 | ) | (66,137 | ) | (54,710 | ) | ||||||
|
Net cash used in financing activities from continuing operations |
(854,928 | ) | (77,419 | ) | (181,270 | ) | ||||||
|
Net cash provided by (used in) financing activities from discontinued operations |
796,946 | (94 | ) | (2,385 | ) | |||||||
|
Net cash used in financing activities |
(57,982 | ) | (77,513 | ) | (183,655 | ) | ||||||
|
Effect of exchange rate changes on cash- continuing operations |
(246 | ) | 265 | 1,387 | ||||||||
|
Effect of exchange rate changes on cash- discontinued operations |
4,412 | 3,676 | 7,943 | |||||||||
|
Net increase in cash and cash equivalents |
66,646 | 216,492 | 5,543 | |||||||||
|
Cash and cash equivalents at beginning of period |
230,560 | 64,679 | 110,683 | |||||||||
|
Add: Cash and cash equivalents of discontinued operations at beginning of period |
162,681 | 112,070 | 60,523 | |||||||||
|
Net increase in cash and cash equivalents |
66,646 | 216,492 | 5,543 | |||||||||
|
Less: Cash and cash equivalents of discontinued operations at end of period |
(2,273 | ) | (162,681 | ) | (112,070 | ) | ||||||
|
Cash and cash equivalents at end of period |
$ | 457,614 | $ | 230,560 | $ | 64,679 | ||||||
|
Supplemental disclosures of cash flow information: |
||||||||||||
|
Interest paid from continuing operations |
$ | 35,369 | $ | 43,167 | $ | 41,666 | ||||||
|
Interest paid from discontinued operations |
16,783 | 6,675 | 5,407 | |||||||||
|
Income taxes paid |
110,453 | 88,845 | 119,351 | |||||||||
|
Dividend of THI net assets in conjunction with THI spin-off, including cash of $166.0 million |
638,858 | 0 | 0 | |||||||||
|
Non-cash investing and financing activities: |
||||||||||||
|
Capital lease obligations incurred from continuing operations |
$ | 1,432 | $ | 3,852 | $ | 278 | ||||||
|
Capital lease obligations incurred from discontinued operations |
3,854 | 3,871 | 4,137 | |||||||||
See accompanying Notes to the Consolidated Financial Statements.
43
Wendy’s International, Inc. and Subsidiaries—Consolidated Statements of Shareholders’ Equity
| Years ended December 31, 2006, January 1, 2006 and January 2, 2005 | ||||||||||||
| (In thousands) | 2006 | 2005 | 2004 | |||||||||
|
Common stock at stated value |
||||||||||||
|
Balance at beginning of period |
$ | 12,549 | $ | 11,809 | $ | 11,676 | ||||||
|
Exercise of options and restricted stock vesting |
406 | 740 | 133 | |||||||||
|
Balance at end of period |
12,955 | 12,549 | 11,809 | |||||||||
|
Capital in excess of stated value |
||||||||||||
|
Balance at beginning of period |
405,588 | 111,286 | 54,310 | |||||||||
|
Exercise of options, including tax benefits of $25,440, $37,816, and $6,159 |
145,049 | 257,589 | 37,651 | |||||||||
|
Initial Public Offering of THI |
716,680 | 0 | 0 | |||||||||
|
THI Minority Interest |
(140,288 | ) | 0 | 0 | ||||||||
|
Unearned compensation – restricted stock |
(37,778 | ) | 0 | 0 | ||||||||
|
Restricted stock awards and other equity-based compensation |
8,282 | 36,713 | 19,325 | |||||||||
|
Tax adjustments related to the THI spin-off |
(7,708 | ) | 0 | 0 | ||||||||
|
Balance at end of period |
1,089,825 | 405,588 | 111,286 | |||||||||
|
Retained earnings |
||||||||||||
|
Balance at beginning of period |
1,858,743 | 1,700,813 | 1,703,488 | |||||||||
|
Net income |
94,312 | 224,067 | 52,035 | |||||||||
|
Dividends |
(72,708 | ) | (66,137 | ) | (54,710 | ) | ||||||
|
Spin-off of THI |
(638,858 | ) | 0 | 0 | ||||||||
|
Balance at end of period |
1,241,489 | 1,858,743 | 1,700,813 | |||||||||
|
Accumulated other comprehensive income |
(13,446 | ) | 114,156 | 102,037 | ||||||||
|
Treasury stock, at cost |
||||||||||||
|
Balance at beginning of period |
(294,669 | ) | (195,124 | ) | (56,992 | ) | ||||||
|
Purchase of common stock |
(1,024,477 | ) | (99,545 | ) | (138,132 | ) | ||||||
|
Balance at end of period |
(1,319,146 | ) | (294,669 | ) | (195,124 | ) | ||||||
|
Unearned compensation – restricted stock |
0 | (37,778 | ) | (15,132 | ) | |||||||
|
Shareholders’ equity |
$ | 1,011,677 | $ | 2,058,589 | $ | 1,715,689 | ||||||
|
Common shares |
||||||||||||
|
Balance issued at beginning of period |
125,490 | 118,090 | 116,760 | |||||||||
|
Exercise of options and restricted stock vesting |
4,058 | 7,400 | 1,330 | |||||||||
|
Balance issued at end of period |
129,548 | 125,490 | 118,090 | |||||||||
|
Treasury shares |
||||||||||||
|
Balance at beginning of period |
(7,681 | ) | (5,681 | ) | (2,063 | ) | ||||||
|
Purchase of common stock |
(26,163 | ) | (2,000 | ) | (3,618 | ) | ||||||
|
Balance at end of period |
(33,844 | ) | (7,681 | ) | (5,681 | ) | ||||||
|
Common shares outstanding |
95,704 | 117,809 | 112,409 | |||||||||
See accompanying Notes to the Consolidated Financial Statements.
44
Wendy’s International, Inc. and Subsidiaries—Consolidated Statements of Comprehensive Income
| Years ended December 31, 2006, January 1, 2006 and January 2, 2005 | ||||||||||||
| (In thousands) | 2006 | 2005 | 2004 | |||||||||
|
Net income |
$ | 94,312 | $ | 224,067 | $ | 52,035 | ||||||
|
Other comprehensive income (expense) |
||||||||||||
|
Translation adjustments, net of tax |
5,402 | 10,820 | 55,980 | |||||||||
|
Cash flow hedges: |
||||||||||||
|
Net change in fair value of derivatives, net of tax |
(7,705 | ) | (3,289 | ) | (2,418 | ) | ||||||
|
Amounts realized in earnings during the period, net of tax |
7,758 | 4,771 | 2,246 | |||||||||
|
Total cash flow hedges |
53 | 1,482 | (172 | ) | ||||||||
|
Pension liability (net of a tax expense of $13,033 and $100 for the years ended December 31, 2006 and January 1, 2006 and tax benefit of $65 for the year ended January 2, 2005, respectively) |
(21,450 | ) | (183 | ) | 105 | |||||||
|
Total other comprehensive income (expense) (1) |
(15,995 | ) | 12,119 | 55,913 | ||||||||
|
Comprehensive income |
$ | 78,317 | $ | 236,186 | $ | 107,948 | ||||||
| (1) | In addition to the amounts presented for 2006 above, accumulated other comprehensive income on the Consolidated Balance Sheets reflects the distribution of $112.2 million of accumulated translation adjustments as part of the spin-off of THI (see Note 6 to the Consolidated Financial Statements). |
See accompanying Notes to the Consolidated Financial Statements.
45
Wendy’s International, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
| NOTE 1 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Description of business
The principal business of Wendy’s International, Inc. and Subsidiaries (the “ Company ”) is the operation, development and franchising of quick-service restaurants serving high-quality food. At year-end 2006, the Company and its franchise owners operated 6,673 restaurants under the name “Wendy’s” in 50 states and in 20 other countries and territories. As of December 31, 2006, total systemwide restaurants included 1,465 company operated restaurants and 5,208 franchise restaurants.
On March 29, 2006, the Company completed its initial public offering (“IPO” ) of Tim Hortons Inc. (“ THI ”). A total of 33.4 million shares of THI were offered at an initial per share price of $23.162 ($27.00 Canadian). The shares sold in the IPO represented 17.25% of total THI shares issued and outstanding and the Company retained the remaining 82.75%. On September 29, 2006, the Company completed the spin-off of its remaining 82.75% ownership in THI, the parent company of the business previously reported as the Hortons segment. Accordingly, the results of operations of THI are reflected as discontinued operations for all periods presented and the assets and liabilities are reflected as discontinued operations at January 1, 2006. During the third quarter of 2006, the Company’s Board of Directors approved the sale of Baja Fresh and on November 28, 2006, the Company completed the sale of Baja Fresh and, accordingly, the results of operations of Baja Fresh are reflected as discontinued operations for all periods presented and the assets and liabilities of Baja Fresh are reflected as discontinued operations at January 1, 2006. On October 9, 2006, the Company’s Board of Directors approved the future sale of Cafe Express and, accordingly, the results of operations and assets and liabilities of Cafe Express are reflected as discontinued operations for all periods presented (see Note 10 to the Consolidated Financial Statements). Baja Fresh and Cafe Express were previously reported as the Developing Brands segment.
Fiscal year
The Company’s fiscal year ends on the Sunday nearest to December 31. The 2004 fiscal year consisted of 53 weeks and the 2006 and 2005 fiscal years consisted of 52 weeks.
Basis of presentation
The Consolidated Financial Statements include the results and balances of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation (see also Note 14 to the Consolidated Financial Statements for consolidation of the Company’s advertising funds).
Investments in unconsolidated affiliates over which the Company exercises significant influence but is not the primary beneficiary and does not have control are accounted for using the equity method. The Company’s share of the net income or loss of these unconsolidated affiliates is included in other expense (income), net. The Company is a partner in a 50/50 restaurant real estate joint venture with THI. After the spin-off of THI on September 29, 2006, this joint venture was no longer consolidated in the Company’s financial statements and Wendy’s 50% share of the joint venture is accounted for using the equity method. The income from this joint venture is included in other expense (income), net on the Consolidated Statements of Income as it is directly related to the operations of the Company.
During the year, the Company revised its presentation of the sale of kids’ meal toys to reflect the sales on a gross versus net basis under the provisions of Emerging Issues Task Force (“ EITF ”) 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent”. The revised presentation had no impact on operating income or net income. Amounts related to the prior years were not material, but were revised for purposes of comparability. The revisions increased sales and cost of sales $59.4 million, $61.6 million and $69.1 million for fiscal years 2006, 2005 and 2004, respectively.
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Cash and cash equivalents
The Company considers short-term investments with original maturities of three months or less as cash equivalents. Cash overdrafts, which occur on bank accounts that are not funded until issued checks are presented for payment, are recorded within accounts payable and totaled $14.0 million and $17.5 million at December 31, 2006 and January 1, 2006, respectively.
Accounting estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make assumptions and estimates. These affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates and judgments are inherent in the calculations of royalty and other franchise-related revenue collections, legal obligations, pension and other postretirement benefits, income taxes, insurance liabilities, various other commitments and contingencies, valuations used when assessing potential impairment of goodwill, other intangibles and fixed assets and the estimation of the useful lives of fixed assets and other long-lived assets. While management applies its judgment based on assumptions believed to be reasonable under the circumstances, actual results could vary from these assumptions. It is possible that materially different amounts would be reported using different assumptions.
In the normal course of business, the Company must make continuing estimates of potential future legal obligations and liabilities, which requires the use of management’s judgment on the outcome of various issues. Management may also use outside legal advice to assist in the estimating process. However, the ultimate outcome of various legal issues could be different than management estimates, and adjustments to income could be required.
Inventories
Inventories, amounting to $17.2 million and $18.1 million at December 31, 2006 and January 1, 2006, respectively, are stated at the lower of cost (first-in, first-out) or market, and consist primarily of restaurant food items, kids’ meal toys, new equipment and parts and paper supplies.
Property and equipment
Depreciation and amortization are recognized using the straight-line method in amounts adequate to amortize costs over the following estimated useful lives: buildings and leasehold improvements and property under capital leases, the lesser of the useful life of the asset (up to 40 years) or the lease term as that term is defined in Statement of Financial Accounting Standards ( “SFAS” ) No. 13, “Accounting for Leases”, as amended; restaurant equipment, up to 15 years; computer hardware, up to 5 years; computer software, up to 10 years; vehicles, up to 7 years; and other equipment, up to 10 years. Interest associated with the construction of new restaurants is capitalized. Rent during the construction of a restaurant is expensed as incurred. Major improvements are capitalized, while maintenance and repairs are expensed when incurred. Long-lived assets are grouped into operating markets and tested for impairment whenever an event occurs that indicates an impairment may exist. The Company tests for impairment using the cash flows of the operating markets. A significant deterioration in the cash flows of an operating market or other circumstances may trigger impairment testing (see also Note 8 to the Consolidated Financial Statements). Gains and losses on the disposition of fixed assets not sold to franchisees are classified in other expense (income), net.
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Property and equipment, at cost, at each year-end consisted of the following:
| (In thousands) | 2006 | 2005 | ||||||
|
Land |
$ | 259,303 | $ | 270,204 | ||||
|
Buildings and leasehold improvements |
994,874 | 1,036,371 | ||||||
|
Restaurant equipment |
564,371 | 541,018 | ||||||
|
Capital leases |
22,746 | 23,393 | ||||||
|
Computer hardware and software |
114,842 | 111,613 | ||||||
|
Vehicles |
23,190 | 34,965 | ||||||
|
Other |
20,074 | 18,900 | ||||||
|
Construction in progress |
25,315 | 58,187 | ||||||
| 2,024,715 | 2,094,651 | |||||||
|
Accumulated depreciation and amortization |
(798,387 | ) | (746,177 | ) | ||||
| $ | 1,226,328 | $ | 1,348,474 | |||||
In accordance with American Institute of Certified Public Accountants’ Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”, the Company capitalizes certain internally developed software costs which are amortized over a period of up to 10 years. At December 31, 2006 and January 1, 2006, capitalized software development costs amounted to $66.8 million and $63.3 million, respectively, which amounts are included in “Computer hardware and software” above.
Leases
For operating leases, minimum lease payments, including minimum scheduled rent increases, are recognized as rent expense on a straight line basis over the lease term as that term is defined in SFAS No. 13, as amended, including any option periods considered in the lease term and any periods during which the Company has use of the property but is not charged rent by a landlord (“rent holiday”). Contingent rentals are generally based on either a percentage of restaurant sales or as a percentage of restaurant sales in excess of stipulated amounts, and thus are not included in minimum lease payments but are included in rent expense when incurred. Rent is expensed during the construction of a restaurant. Leasehold improvement incentives paid to the Company by a landlord are recorded as a liability and amortized as a reduction of rent expense over the lease term. No individual lease is material to the Company.
When determining the lease term for purposes of recording depreciation and rent or for evaluating whether a lease is capital or operating, the Company includes option periods for which failure to renew the lease imposes an economic penalty on the Company of such an amount that a renewal appears, at the inception of the lease, to be reasonably assured. For example, such an economic penalty would exist if the Company were to choose not to exercise an option on leased land upon which the Company had constructed a restaurant and, as a result, the Company would lose the ability to use the restaurant if the lease was not renewed.
Like other companies in the restaurant and retail industries, in the fourth quarter of 2004 the Company reviewed its accounting practices with respect to leasing transactions. Following this review, the Company corrected its prior lease accounting practices. The cumulative reduction in expense to continuing operations as a result of the change in lease accounting practices totaled $3.0 million pretax ($1.9 million after tax). The cumulative adjustment was recorded in the 2004 Consolidated Financial Statements in the fourth quarter. The result of the correction is primarily to conform the lease term used to amortize leasehold improvements on leased property with the term used to recognize straight-line rent, including during “rent holiday” periods while constructing leasehold improvements.
Goodwill and other intangibles
Goodwill is the excess of the cost of an acquired entity over the fair value of acquired net assets. For purposes of testing goodwill for impairment, the Company has determined that its reporting units are Wendy’s U.S. and
48
Wendy’s Canada. Each constitutes a business and has discrete financial information available which is regularly reviewed by management. The Company tests goodwill for impairment at least annually by comparing the fair value of each reporting unit, using discounted cash flows or market multiples based on earnings, to the carrying value to determine if there is an indication that a potential impairment may exist (see also Note 2 to the Consolidated Financial Statements).
Definite-lived intangibles separate from goodwill are amortized on a straight-line basis over periods of up to 15 years. Lives are generally related to legal or contractual lives, but in some cases must be estimated by management based on specific circumstances. The Company tests intangible assets for impairment whenever events or circumstances indicate that an impairment may exist.
Notes receivable, net
Notes receivable arise primarily from agreements by the Company, under certain circumstances, to a structured repayment plan for past due franchisee obligations. The need for a reserve for uncollectible amounts is reviewed on a specific franchisee basis using information available to the Company, including past due balances and the financial strength of the franchisee. Notes receivable, net were $8.9 million and $3.7 million at December 31, 2006 and January 1, 2006, respectively, of which $0.5 million and $1.8 million, respectively, was classified in current assets.
Revenue recognition
Wendy’s has a significant number of company operated restaurants at which revenue is recognized as customers pay for products at the time of sale. Franchise revenues consist of royalties, rents, gains from the sales of properties to franchisees, and various franchise fees. Royalty revenues are normally collected within two months after a period ends. The timing of revenue recognition for both retail sales and franchise revenues does not involve significant contingencies and judgments other than providing adequate reserves against collections of franchise-related revenues. Also, see discussion of “Franchise operations” below for further information regarding franchise revenues.
Franchise operations
The Company grants franchises to independent operators who in turn pay a technical assistance fee, royalties, and in some cases, rents for each restaurant opened (see Note 4 to the Consolidated Financial Statements for the amount of rent revenue included in franchise revenue for each of the last three years). A technical assistance fee is recorded as income when each restaurant commences operations. Royalties, based upon a percent of monthly sales, are recognized as income on the accrual basis. The Company has established reserves related to the collection of franchise royalties and other franchise-related receivables and commitments (see Note 12 to the Consolidated Financial Statements).
Franchise owners receive assistance in such areas as real estate site selection, construction consulting, purchasing and marketing from company personnel who also furnish these services to company operated restaurants. These franchise expenses are included in general and administrative expenses.
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The following are changes in the Company’s franchised locations for each of the fiscal years 2004 through 2006:
| Franchise restaurant progression | 2006 | 2005 | 2004 | ||||||
|
Franchise restaurants in operation—beginning of year |
5,244 | 5,184 | 5,016 | ||||||
|
Franchises opened |
96 | 155 | 226 | ||||||
|
Franchises closed |
(162 | ) | (89 | ) | (88 | ) | |||
|
Net transfers within the system |
30 | (6 | ) | 30 | |||||
|
Franchise restaurants in operation— end of year |
5,208 | 5,244 | 5,184 | ||||||
|
Company-owned restaurants— end of year |
1,465 | 1,502 | 1,487 | ||||||
|
Total system-wide restaurants— end of year |
6,673 | 6,746 | 6,671 |
Advertising costs
The Company expenses advertising costs as incurred with the exception of media development costs that are expensed beginning in the month that the advertisement is first communicated (see Note 14 to the Consolidated Financial Statements).
Foreign operations
At December 31, 2006, the Company and its franchise owners operated 377 Wendy’s restaurants in Canada. Additionally, there are 341 Wendy’s restaurants in other foreign countries and territories, primarily operated by franchisees. The functional currency of each foreign subsidiary is the respective local currency. Assets and liabilities are translated at the year-end exchange rates and revenues and expenses are translated at average exchange rates for the period. Resulting translation adjustments are recorded as a component of shareholders’ equity and in other comprehensive income (expense). Total translation adjustments included in accumulated other comprehensive income (expense) at December 31, 2006 and January 1, 2006 were $9.1 million and $115.9 million, respectively. Total transaction (gains) losses included in other expense (income), net, were less than $(0.1) million for 2006, less than $0.1 million for 2005 and were $0.2 million for 2004.
Derivative instruments
The Company’s exposure to foreign exchange risk is primarily related to fluctuations between the Canadian dollar and the U.S. dollar. The Company seeks to manage significant cash flow and income statement exposures arising from these fluctuations and may use derivative products to reduce the risk of a significant impact on its cash flows or income. These risks have included imports paid for by Canadian operations in U.S. dollars and certain Canadian dollar intercompany payments ultimately transferred to U.S. entities as part of the Company’s centralized approach to cash management. Historically, forward currency contracts have been entered into as cash flow hedges primarily for the benefit of THI relative to foreign currency risks related to the THI Canadian operations. The Company has investments in foreign subsidiaries. The net assets of these subsidiaries are exposed to volatility in currency exchange rates. The Company may use derivative financial instruments to hedge this exposure. 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 flows. The Company has a policy forbidding trading or speculating in foreign currency. Derivative fair values used by the Company are based on quoted market prices.
The Company also 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. The Company entered into an interest rate swap in 2003 for the notional amount of $100.0 million, which matured in December 2005 and met specific conditions of Statement of Financial Accounting Standards ( “SFAS” ) No. 133, “Accounting for Derivative Instruments and Hedging Activities”, 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 were completely offset against gains or losses of the underlying debt obligation until the interest rate swap matured. (See also Note 3 to the Consolidated Financial Statements).
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Other expense (income), net
The following represents the components of other expense (income), net as presented on the Consolidated Statements of Income for each of the periods presented:
| (In thousands) | 2006 | 2005 | 2004 | |||||||||
|
Restructuring costs |
$ | 38,914 | $ | 0 | $ | 0 | ||||||
|
Store closing costs |
16,737 | 24,696 | 0 | |||||||||
|
Rent revenue |
(14,021 | ) | (16,359 | ) | (14,401 | ) | ||||||
|
(Gain) loss from property dispositions |
(6,833 | ) | (46,855 | ) | 464 | |||||||
|
Equity investments and other, net |
2,671 | 4,255 | 12,608 | |||||||||
|
Other expense (income), net |
$ | 37,468 | $ | (34,263 | ) | $ | (1,329 | ) | ||||
Rent revenue shown above represents rent paid by THI to a 50/50 restaurant real estate joint venture between Wendy’s and THI. Since the spin-off of THI, this joint venture is no longer consolidated in the Company’s financial statements, Wendy’s 50% equity share of the joint venture income is included in other expense (income), net and the rent revenue from THI is now included in other expense (income), net. See Notes 8 and 10 to the Consolidated Financial Statements for discussion of asset impairments and restructuring costs, respectively.
Net income per share
Basic earnings per common share are computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Diluted computations are based on the treasury stock method and include assumed conversions of stock options, restricted stock and restricted stock units, when outstanding and dilutive.
The computation of diluted earnings per common share excludes options to purchase 0.3 million and 4.3 million shares in 2005 and 2004, respectively, because the exercise price of these options was greater than the average market price of the common shares in the respective periods and therefore, they were antidilutive. There were no options excluded from the computation of diluted earnings per common share in 2006 as they were all dilutive. The computations of basic and diluted earnings per common share for each year are shown in the following table:
| (In thousands except per share amounts) | 2006 | 2005 | 2004 | |||||||
|
Income from continuing operations for the computation of basic earnings per common share |
$ | 37,046 | $ | 85,095 | $ | 106,144 | ||||
|
Income from discontinued operations for the computation of basic earnings per common share |
57,266 | 138,972 | (54,109 | ) | ||||||
|
Net income for the computation of basic earnings per common share |
$ | 94,312 | $ | 224,067 | $ | 52,035 | ||||
|
Weighted average shares for computation of basic earnings per common share |
114,244 | 114,945 | 113,832 | |||||||
|
Effect of dilutive stock options and restricted stock |
1,081 | 1,874 | 1,853 | |||||||
|
Weighted average shares for computation of diluted earnings per common share |
115,325 | 116,819 | 115,685 | |||||||
|
Basic earnings per common share from continuing operations |
$ | 0.33 | $ | 0.74 | $ | 0.93 | ||||
|
Basic earnings per common share from discontinued operations |
$ | 0.50 | $ | 1.21 | $ | (0.47 | ) | |||
|
Total basic earnings per common share |
$ | 0.83 | $ | 1.95 | $ | 0.46 | ||||
|
Diluted earnings per common share from continuing operations |
$ | 0.32 | $ | 0.73 | $ | 0.92 | ||||
|
Diluted earnings per common share from discontinued operations |
$ | 0.50 | $ | 1.19 | $ | (0.47 | ) | |||
|
Total diluted earnings per common share |
$ | 0.82 | $ | 1.92 | $ | 0.45 | ||||
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Stock options and other equity-based compensation
The Company has various plans which provide stock options and, beginning in 2004 and 2005, restricted stock, restricted stock units and performance shares (together “restricted shares” ), for certain employees and outside directors to acquire common shares of the Company. Grants of stock options and restricted shares to employees and the periods during which such stock options can be exercised are at the discretion of the Compensation Committee of the Board of Directors. Grants of stock options and restricted shares to outside directors and the periods during which such options can be exercised are specified in the plan applicable to directors and do not involve discretionary authority of the Board. All options expire at the end of the exercise period. Options are granted with exercise prices equal to the fair market value of the Company’s common shares on the date of grant.
Prior to January 2, 2006, the Company used 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”. Accordingly, because stock options granted prior to January 2, 2006 had no intrinsic value at date of grant, compensation expense related to stock options was recognized using the Black-Scholes method only when stock option awards were modified after the grant date. During the fourth quarter of 2005, the Company accelerated the vesting of all outstanding options, excluding those held by outside directors of the Company. As a result of modifying the vesting period of the options, the Company recorded $3.5 million pretax in compensation expense in continuing operations in accordance with Financial Accounting Standards Board (“ FASB ”) Interpretation No. (“ FIN ”) 44, “Accounting for Certain Transactions Involving Stock Compensation”. The expense represents the intrinsic value, on the date vesting was accelerated, for the estimated number of stock options that would have been forfeited according to the original terms of the options that will no longer be forfeited due to the acceleration of the vesting. The decision to accelerate vesting of stock options was made primarily to reduce non-cash expense in 2006, 2007 and 2008 of approximately $8 million, $3 million and $1 million, respectively. The Company’s Compensation Committee imposed a holding period that will require all executive officers to refrain from selling net shares acquired upon any exercise of these accelerated options, until the date on which the exercise would have been permitted under the option’s original vesting terms or, if earlier, the executive officer’s death, disability or termination of employment. Prior to January 2, 2006, compensation expense recognized related to restricted shares was measured based on the market value of the Company’s common stock on the date of grant. The Company generally satisfies share-based exercises and vesting through the issuance of authorized but previously unissued shares of Company stock. Restricted shares are generally net-settled with new Company shares withheld, and not issued, to meet the employee’s minimum statutory withholding tax requirements.
On January 2, 2006, the Company adopted SFAS No. 123R “Share-Based Payment”, which requires share-based compensation cost to be recognized based on the grant date estimated fair value of each award, net of estimated cancellations, over the employee’s requisite service period, which is generally the vesting period of the equity grant. The Company elected to adopt SFAS No. 123R using the modified prospective method, which requires compensation expense to be recorded for all unvested share-based awards beginning in the first quarter of adoption. Accordingly, the prior periods presented in this Form 10-K have not been restated to reflect the fair value method of expensing stock options. Also, because the value used to measure compensation expense for restricted shares is the same for APB Opinion No. 25 and SFAS No. 123R and because substantially all of the Company’s stock option grants were fully vested prior to January 2, 2006, the adoption of SFAS No. 123R did not have a material impact on the Company’s operating income, pretax income or net income. In accordance with SFAS No. 123R, tax benefits received of $29.2 million in continuing operations and $0.4 million in discontinued operations related to equity award grants that are in excess of the tax benefits recorded on the Company’s Consolidated Statements of Income are classified as a cash inflow in the financing section of the Company’s Consolidated Statements of Cash Flows. Also in accordance with SFAS No. 123R, the unearned compensation amount previously separately displayed under shareholders’ equity was reclassified during the first quarter of 2006 to capital in excess of stated value on the Company’s Consolidated Balance Sheets. In March 2005, the Securities and Exchange Commission (the “ SEC ”) issued Staff Accounting Bulletin (“ SAB ”) No. 107 regarding the SEC’s interpretation of SFAS No. 123R. The Company has applied the provisions of SAB No. 107 in its adoption of SFAS No. 123R.
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The Company recorded the following stock compensation expense:
| Year Ended | |||||||||
| (In thousands) | 2006 | 2005 | 2004 | ||||||
|
Continuing operations: |
|||||||||
|
Before-tax |
$ | 11,413 | $ | 16,194 | $ | 3,802 | |||
|
After-tax |
7,240 | 10,531 | 2,414 | ||||||
|
Discontinued operations: |
|||||||||
|
Before-tax |
10,383 | 4,072 | 315 | ||||||
|
After-tax |
6,587 | 2,648 | 200 | ||||||
|
Total: |
|||||||||
|
Before-tax |
21,796 | 20,266 | 4,117 | ||||||
|
After-tax |
$ | 13,827 | $ | 13,179 | $ | 2,614 | |||
The decrease in stock compensation expense recognized in continuing operations in 2006 from 2005 is primarily attributed to higher cancellations in 2006 as a result of the reduction in force in the second half (see Note 9 to the Consolidated Financial Statements) and the impact of the stock option acceleration charge in 2005. In the first quarter of 2006, the Company recorded a pretax adjustment of $1.7 million ($1.1 million net of tax) to correct cumulative compensation expense. The adjustment was not material to the current year or to prior years. The increase in stock compensation expense recognized in continuing operations in 2005 from 2004 is primarily attributed to additional performance award grants in 2005, the recognition of the first full year of restricted shares expense in 2005 (the first restricted stock grants for continuing operations employees occurred in the second quarter of 2004) and the stock option acceleration charge in 2005. The increase in stock compensation expense recognized in discontinued operations in 2006 compared to 2005 is primarily attributed to the acceleration of expense due to the THI spin-off, sale of Baja Fresh and additional 2006 grants awarded by THI. The increase in stock compensation expense recognized in discontinued operations in 2005 from 2004 is primarily attributed to the first restricted shares grants for THI employees occurring in the second quarter of 2005 and the stock option acceleration charge in 2005.
Included in the continuing operations amounts above for 2006 is $2.5 million ($1.6 million after-tax) in additional stock compensation expense recognized in connection with the Company’s voluntary enhanced retirement plan (see Note 9 to the Consolidated Financial Statements). This expense is included in restructuring costs in other expense (income), net.
In calculating the fair value of options issued to employees that received grants in 2004, the Company used the following assumptions:
| Assumption | 2004 | |
|
Dividend yield |
1.2% | |
|
Expected volatility |
27% | |
|
Risk-free interest rate |
2.8% | |
|
Expected lives |
3.1 years | |
|
Per share weighted average fair value of options granted |
$8.22 |
In calculating the fair value of 2004 stock options issued to key employees and outside directors, the Company used the following assumptions:
| Assumption | 2004 | |
|
Dividend yield |
1.2% | |
|
Expected volatility |
31% | |
|
Risk-free interest rate |
3.5% | |
|
Expected lives |
4.9 years | |
|
Per share weighted average fair value of options granted |
$11.89 |
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The pro-forma disclosures for 2005 and 2004 below are provided as if the Company had adopted the cost recognition requirements under SFAS No. 123 “Accounting for Stock-Based Compensation”. Under SFAS No. 123, the fair value of each stock 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. Had compensation expense been recognized for stock-based compensation plans in accordance with provisions of SFAS No. 123 in 2005 and 2004, the Company would have recorded net income and earnings per share as follows:
| (In thousands, except per share data) | 2005 | 2004 | ||||||
|
Net income, as reported |
$ | 224,067 | $ | 52,035 | ||||
|
Add: Stock compensation cost recorded under APB Opinion No. 25, net of tax |
13,179 | 2,614 | ||||||
|
Deduct: Stock compensation cost calculated under SFAS No. 123, net of tax |
(47,283 | ) | (19,205 | ) | ||||
|
Pro-forma net income |
$ | 189,963 | $ | 35,444 | ||||
|
Basic as reported |
$ | 1.95 | $ | 0.46 | ||||
|
Basic pro-forma |
$ | 1.65 | $ | 0.31 | ||||
|
Diluted as reported |
$ | 1.92 | $ | 0.45 | ||||
|
Diluted pro-forma |
$ | 1.63 | $ | 0.31 | ||||
The above stock compensation cost calculated under SFAS No. 123, net of tax, was based on costs generally computed over the vesting period of the awards. Upon adoption, SFAS No. 123R required compensation cost for stock-based compensation awards to be recognized immediately for retirement eligible employees and over the period from the grant date to the date retirement eligibility is achieved, if that period is shorter than the normal vesting period. The table below shows the impact on the Company’s reported diluted earnings per share and the above pro-forma diluted earnings per share as if the SFAS No. 123R guidance on recognition of stock compensation expense for retirement eligible employees was applied to the periods reflected in the financial statements.
| 2006 | 2005 | 2004 | |||||||||
|
Impact on: |
|||||||||||
|
Diluted as reported |
$ | 0.06 | $ | (0.05 | ) | $ | (0.02 | ) | |||
|
Diluted pro-forma |
N/A | $ | 0.03 | $ | (0.01 | ) | |||||
The impact of applying SFAS No. 123R in these pro-forma disclosures is not necessarily indicative of future results.
| NOTE 2 | GOODWILL AND OTHER INTANGIBLE ASSETS |
The table below presents amortizable intangible assets as of December 31, 2006 and January 1, 2006:
| (In thousands) |
Gross
Carrying Amount |
Accumulated
Amortization |
Net
Carrying Amount |
|||||||
|
2006 |
||||||||||
|
Amortizable intangible assets: |
||||||||||
|
Patents and trademarks |
$ | 452 | $ | (424 | ) | $ | 28 | |||
|
Purchase options |
7,500 | (6,680 | ) | 820 | ||||||
|
Other |
4,956 | (1,949 | ) | 3,007 | ||||||
| $ | 12,908 | $ | (9,053 | ) | $ | 3,855 | ||||
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| (In thousands) |
Gross
Carrying Amount |
Accumulated
Amortization |
Net
Carrying Amount |
|||||||
|
2005 |
||||||||||
|
Amortizable intangible assets: |
||||||||||
|
Patents and trademarks |
$ | 452 | $ | (312 | ) | $ | 140 | |||
|
Purchase options |
7,500 | (6,001 | ) | 1,499 | ||||||
|
Other |
4,806 | (1,602 | ) | 3,204 | ||||||
| $ | 12,758 | $ | (7,915 | ) | $ | 4,843 | ||||
Included in other above is $2.9 million and $3.2 million as of December 31, 2006 and January 1, 2006, respectively, net of accumulated amortization of $1.9 million and $1.6 million, primarily related to the use of the name and likeness of Dave Thomas, the late founder of Wendy’s.
Total intangibles amortization expense was $1.1 million for the year-ended December 31, 2006 and $1.1 million for the year-ended January 1, 2006. The estimated annual intangibles amortization expense for 2007 is approximately $0.9 million. For the years 2008 and 2009, the estimated intangibles amortization expense is approximately $0.5 million annually and for the years 2010 and 2011 is approximately $0.3 million annually.
The changes in the carrying amount of goodwill for the year ended December 31, 2006 are as follows:
| (In thousands) | ||||
|
Balance as of January 1, 2006 |
$ | 81,875 | ||
|
Goodwill recorded in connection with acquisitions |
3,486 | |||
|
Translation adjustments |
(8 | ) | ||
|
Balance as of December 31, 2006 |
$ | 85,353 | ||
The changes in the carrying amount of goodwill for the year ended January 1, 2006, are as follows:
| (In thousands) | ||||
|
Balance as of January 2, 2005 |
$ | 76,937 | ||
|
Goodwill recorded in connection with acquisitions |
5,504 | |||
|
Goodwill related to dispositions |
(660 | ) | ||
|
Translation adjustments |
94 | |||
|
Balance as of January 1, 2006 |
$ | 81,875 | ||
Under SFAS No. 142, “Goodwill and Other Intangibles”, goodwill and other indefinite-lived intangibles must be tested for impairment annually (or in interim periods if events indicate possible impairment). The Company tested goodwill for impairment as of year-end 2006 and 2005 and no impairment was indicated.
| NOTE 3 | TERM DEBT |
Term debt at each year-end consisted of the following:
| (In thousands) | 2006 | 2005 | ||||||
|
Notes, unsecured, and mortgages payable with a weighted average interest rate of 8.9%, due in installments through 2009 |
$ | 883 | $ | 2,151 | ||||
|
6.25% Senior Notes, due November 15, 2011 |
199,562 | 199,487 | ||||||
|
6.20% Senior Notes, due June 15, 2014 |
224,551 | 224,505 | ||||||
|
7% Debentures, due December 15, 2025 |
96,996 | 96,925 | ||||||
|
Other, with an interest rate of 11.1%, due May 2008 |
93,977 | 0 | ||||||
|
Advertising fund debt at an interest rate of 6.75% due September 30, 2007 |
7,639 | 0 | ||||||
| 623,608 | 523,068 | |||||||
|
Current portion of long-term obligations |
(86,469 | ) | (1,268 | ) | ||||
| $ | 537,139 | $ | 521,800 | |||||
55
The U.S. advertising fund has a revolving line of credit of $25 million with an interest rate of 0.25% on the unused portion. Wendy’s is not the guarantor of the debt. The advertising fund debt was incurred to fund the advertising fund operations.
The 6.25% Senior Notes were issued in 2001 in connection with the Company’s share repurchases (see Note 6 to the Consolidated Financial Statements). The 6.20% Senior Notes were issued in 2002 in connection with the Company’s purchase of Baja Fresh. The 6.25% and 6.20% Senior Notes are redeemable prior to maturity at the option of the Company. The 7% Debentures are not redeemable by the Company prior to maturity. All of the Company’s notes and debentures are unsecured.
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 a cash payment in 2006 of $94.0 million. Royalties subject to the agreement relate to royalties payable to a subsidiary of the Company for both company operated and franchised stores. In accordance with EITF 88-18 “Sales of Future Revenues”, the Company has classified the $94.0 million of cash received in 2006 as debt, which is reflected as other debt in the table above. This amount will be amortized using the interest method over the life of the agreement, which concludes in May 2008. Changes in estimated cash flows will be reflected prospectively in interest expense.
In March 2003, the Company entered into an interest rate swap that met the specific conditions of SFAS No. 133 to be considered a highly effective fair value hedge of the previously outstanding 6.35% notes. By entering into the interest rate swap, the Company agreed to receive interest at a fixed rate and pay interest at a variable rate. The interest rate swap matured in December 2005.
Based on future cash flows and current interest rates for all term debt, the fair value of the Company’s term debt was approximately $612 million and $560 million at December 31, 2006 and January 1, 2006, respectively.
Future maturities for all term debt are as follows:
| (In thousands) | |||
|
2007 |
$ | 86,469 | |
|
2008 |
16,001 | ||
|
2009 |
29 | ||
|
2010 |
0 | ||
|
2011 |
199,562 | ||
|
Later years |
321,547 | ||
| $ | 623,608 | ||
The Company’s debt agreements contain covenants that specify limits on the amount of indebtedness secured by liens and the maximum aggregate value of restaurant property as to which the Company could enter into sale-leaseback transactions. The Company was in compliance with these covenants as of December 31, 2006 and will continue to monitor these on a regular basis.
The Company currently has a shelf registration statement which would enable the Company to issue securities up to $500 million. As of December 31, 2006 and January 1, 2006, no securities under this shelf registration statement had been issued.
On March 1, 2006, the Company entered into a new $200 million unsecured revolving credit facility, which expires on March 1, 2008 and which replaced the Company’s previous $200 million revolving credit facility entered into in 2003. The new revolving credit facility contains various covenants which, among other things,
56
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. The Company was in compliance with these covenants as of December 31, 2006. The Company is charged interest on advances that varies based on the type of advance utilized by the Company, which is either an alternate base rate (greater of prime or Federal funds plus 0.5%) or a rate based on LIBOR plus a margin that varies based on the Company’s debt rating at the time of the advance. The Company is also charged a facility fee based on the total credit facility. This fee varies from 0.07% to 0.20% based on the Company’s debt rating. As of December 31, 2006, no amounts under this credit facility were drawn.
In the first quarter of 2006, $35.0 million in commercial paper was issued for general corporate purposes and repaid. In 2004, $25.0 million in commercial paper was issued for general corporate purposes and was repaid in the first quarter of 2005. Due to the Company’s current debt ratings, the Company does not currently have access to its commercial paper program.
At December 31, 2006, the Company’s Canadian subsidiary had a revolving credit facility with approximately $6 million Canadian available at December 31, 2006. This facility bears interest at a rate of 6.0%, has no financial covenants and no amounts under the facility were outstanding at December 31, 2006.
| NOTE 4 | LEASES |
The Company occupies land and buildings and uses equipment under terms of numerous lease agreements, substantially all of which expire on various dates through 2046. Lease terms of land and building leases are generally equal to the initial lease period of 10 to 20 years, while land only lease terms can extend up to 40 years. Many of these leases provide for future rent escalations and renewal options. Certain leases require contingent rent, determined as a percentage of sales, generally when annual sales exceed specified levels. Most leases also obligate the Company to pay the cost of maintenance, insurance and property taxes.
At each year-end, assets leased under capital leases with the Company as the lessee consisted of the following:
| (In thousands) | 2006 | 2005 | ||||||
|
Buildings |
$ | 22,746 | $ | 24,918 | ||||
|
Accumulated depreciation |
(8,889 | ) | (11,086 | ) | ||||
| $ | 13,857 | $ | 13,832 | |||||
At December 31, 2006, future minimum lease payments to be made by the Company for all leases, and the present value of the net minimum lease payments for capital leases, were as follows:
| (In thousands) |
Capital Leases |
Operating Leases |
|||||
|
2007 |
$ | 2,131 | $ | 58,063 | |||
|
2008 |
2,168 | 55,441 | |||||
|
2009 |
2,235 | 55,437 | |||||
|
2010 |
2,039 | 47,154 | |||||
|
2011 |
1,829 | 43,219 | |||||
|
Later years |
21,374 | 705,925 | |||||
|
Total minimum lease payments |
31,776 | $ | 965,239 | ||||
|
Amount representing interest |
(11,886 | ) | |||||
|
Present value of net minimum lease payments |
19,890 | ||||||
|
Current portion |
(927 | ) | |||||
| $ | 18,963 | ||||||
57
Total minimum lease payments have not been reduced by minimum sublease rentals of $4.4 million under capital leases, and $21.1 million under operating leases payable to the Company in the future under non-cancelable subleases.
Rent expense for each year is included in company restaurant operating costs, operating costs and general and administrative expenses and amounted to:
| (In thousands) | 2006 | 2005 | 2004 | ||||||
|
Minimum rents |
$ | 75,663 | $ | 76,974 | $ | 84,487 | |||
|
Contingent rents |
9,937 | 10,277 | 12,062 | ||||||
| $ | 85,600 | $ | 87,251 | $ | 96,549 | ||||
In connection with the franchising of certain restaurants, the Company has leased or subleased land, buildings and equipment to the related franchise owners. Most leases to franchisees provide for monthly rentals based on a percentage of sales, while others provide for fixed payments with contingent rent when sales exceed certain levels. Lease terms are approximately 10 to 20 years with one or more five-year renewal options. The franchise owners bear the cost of maintenance, insurance and property taxes.
The Company leases, as lessor, some building and equipment under fixed payment terms and accounts for these leases as direct financing leases. The land portion of leases and leases with rents based on a percentage of sales are accounted for as operating leases. At each year-end, the net investment in direct financing leases, included in other assets, consisted of the following:
| (In thousands) | 2006 | 2005 | ||||||
|
Total minimum lease receipts |
$ | 10,087 | $ | 12,363 | ||||
|
Estimated unguaranteed residual value |
117 | 272 | ||||||
|
Amount representing unearned interest |
(5,086 | ) | (6,248 | ) | ||||
|
Current portion, included in accounts receivable |
(142 | ) | (199 | ) | ||||
| $ | 4,976 | $ | 6,188 | |||||
At each year-end, company assets leased under operating leases with the Company as lessor is shown below. The significant decrease from 2005 to 2006 is due primarily to the deconsolidation of the 50/50 restaurant real estate joint venture between Wendy’s and THI after the spin-off of THI.
| (In thousands) | 2006 | 2005 | ||||||
|
Land |
$ | 13,015 | $ | 39,828 | ||||
|
Buildings and leasehold improvements |
51,619 | 151,978 | ||||||
|
Equipment |
8,383 | 9,237 | ||||||
| 73,017 | 201,043 | |||||||
|
Accumulated depreciation |
(32,909 | ) | (57,344 | ) | ||||
| $ | 40,108 | $ | 143,699 | |||||
At December 31, 2006, future minimum lease receipts were as follows:
| (In thousands) |
Direct Financing Leases |
Operating Leases |
||||
|
2007 |
$ | 453 | $ | 3,637 | ||
|
2008 |
431 | 3,204 | ||||
|
2009 |
591 | 3,013 | ||||
|
2010 |
607 | 2,663 | ||||
|
2011 |
615 | 2,229 | ||||
|
Later years |
7,390 | 11,841 | ||||
| $ | 10,087 | $ | 26,587 | |||
58
Rental income for each year is included in franchise revenues and amounted to:
| (In thousands) | 2006 | 2005 | 2004 | ||||||
|
Minimum rents |
$ | 3,360 | $ | 5,023 | $ | 5,108 | |||
|
Contingent rents |
17,581 | 32,755 | 36,108 | ||||||
| $ | 20,941 | $ | 37,778 | $ | 41,216 | ||||
In addition to the rental income in the table above, there is rent revenue included in other expense (income), net, which represents rent paid by THI to a 50/50 restaurant real estate joint venture between Wendy’s and THI. After the spin-off of THI on September 29, 2006, this joint venture is no longer consolidated in the Company’s financial statements.
| NOTE 5 | INCOME TAXES |
Earnings from continuing operations before taxes:
| (In thousands) | 2006 | 2005 | 2004 | ||||||
|
Domestic |
$ | 32,173 | $ | 133,996 | $ | 165,891 | |||
|
Foreign |
10,306 | 2,788 | 10,299 | ||||||
|
Total |
$ | 42,479 | $ | 136,784 | $ | 176,190 | |||
The provision for income taxes on earnings from continuing operations consisted of the following:
| (In thousands) | 2006 | 2005 | 2004 | |||||||||
|
Current |
||||||||||||
|
Federal |
$ | 27,315 | $ | 52,316 | $ | 55,121 | ||||||
|
State and local |
2,923 | 6,649 | 10,192 | |||||||||
|
Foreign |
6,976 | 5,199 | 5,751 | |||||||||
| 37,214 | 64,164 | 71,064 | ||||||||||
|
Deferred |
||||||||||||
|
Federal |
(28,547 | ) | (8,703 | ) | (3,185 | ) | ||||||
|
State and local |
(1,698 | ) | (2,602 | ) | 1,890 | |||||||
|
Foreign |
(1,536 | ) | (1,170 | ) | 277 | |||||||
| (31,781 | ) | (12,475 | ) | (1,018 | ) | |||||||
| $ | 5,433 | $ | 51,689 | $ | 70,046 | |||||||
The provision for foreign taxes includes withholding taxes.
The temporary differences which give rise to deferred tax assets and liabilities each year-end consisted of the following:
| (In thousands) | 2006 | 2005 | |||||
|
Deferred tax assets |
|||||||
|
Lease transactions |
$ | 14,323 | $ | 12,666 | |||
|
Property and equipment basis differences |
3,426 | 2,710 | |||||
|
Intangible assets basis differences |
14,327 | 10,530 | |||||
|
Benefit plans transactions |
14,922 | 13,354 | |||||
|
Reserves not currently deductible |
21,361 | 19,296 | |||||
|
Deferred income |
35,092 | 3,288 | |||||
|
Capital loss carryforward |
81,000 | 0 | |||||
|
All other |
640 | 2,489 | |||||
| $ | 185,091 | $ | 64,333 | ||||
|
Valuation allowance |
(81,000 | ) | 0 | ||||
| $ | 104,091 | $ | 64,333 | ||||
59
| (In thousands) | 2006 | 2005 | ||||
|
Deferred tax liabilities |
||||||
|
Lease transactions |
$ | 1,934 | $ | 2,414 | ||
|
Benefit plans transactions |
0 | 16,246 | ||||
|
Property and equipment basis differences |
77,039 | 68,765 | ||||
|
Intangible assets basis differences |
10,611 | 9,766 | ||||
|
Capitalized expenses deducted for tax |
9,250 | 9,709 | ||||
|
All other |
1,510 | 2,919 | ||||
| $ | 100,344 | $ | 109,819 | |||
Certain amounts in the above table for 2005 have been reclassified to conform to the current year presentation. These reclassifications had no impact on the Consolidated Balance Sheets presentation.
The pension liability expense adjustment appearing in the shareholders’ equity section of the balance sheet under accumulated other comprehensive income is shown net of deferred taxes of $13.7 million and $0.7 million in 2006 and 2005, respectively. Accordingly, these deferred taxes are not reflected in the table above.
A deferred tax asset has been established for the capital loss carryforward resulting from the sale of Baja Fresh in 2006. Federal capital losses may be carried forward for five years. The Company has reviewed various SFAS No. 109 tax planning strategies, including sale and leasebacks, which might be used to realize the benefit of these loss carryforwards. These strategies, as of December 31, 2006, do not meet the “prudent and feasible” criteria of SFAS No. 109 and accordingly the valuation allowance in the amount of $81.0 million has been recorded as a result of management’s determination that it is more likely than not these capital losses will not be used.
A reconciliation of the statutory U.S. federal income tax rate of 35% to the Company’s effective tax rate for each year is shown below:
| (In thousands) | 2006 | 2005 | 2004 | |||||||||
|
Income taxes at statutory rate |
$ | 14,868 | $ | 47,874 | $ | 61,666 | ||||||
|
State and local taxes, net of federal benefit |
78 | 3,434 | 10,453 | |||||||||
|
Tax on foreign earnings, net of foreign tax credits |
(361 | ) | (430 | ) | (798 | ) | ||||||
|
Work opportunity and jobs tax credits |
(2,223 | ) | (1,709 | ) | (1,274 | ) | ||||||
|
Prior year tax adjustments |
(6,846 | ) | 2,332 | (646 | ) | |||||||
|
Other |
(83 | ) | 188 | 645 | ||||||||
|
Income taxes at effective rate |
$ | 5,433 | $ | 51,689 | $ | 70,046 | ||||||
The prior year tax adjustments line item in the rate reconciliation above includes the effects of federal and state tax exam settlements, statute of limitation lapses and changes in estimates used in calculating the income tax provision.
The determination of annual income tax expense takes into consideration amounts including interest and penalties which may be needed to cover exposures for open tax years. The Internal Revenue Service ( “ IRS ” ) is currently conducting an examination of the Company’s U.S. federal income tax returns for the year 2005 and the 2006 year as part of the IRS’s Compliance Assurance Process program. The Company is before the IRS Appeals for the years 1998 through 2004 as it relates to a refund claim for the work-opportunity tax credit. The Company is before the U.S. Competent Authority for the years 1999 through 2001 as it relates to transfer pricing on royalties and fees between U.S. and Canada. The Company is involved with various audits at the state and local level. The Company does not expect any material impact on earnings to result from the resolution of matters related to open tax years; however actual settlements may differ from amounts accrued. Amounts related to IRS examinations of federal income tax returns for 2004 and prior years have been settled and paid.
U.S. income taxes and foreign withholding taxes are not provided on undistributed earnings of foreign subsidiaries which are considered to be indefinitely reinvested in the operations of such subsidiaries. The amount of these earnings was approximately $4 million at December 31, 2006.
60
The Company is a party to a Tax Sharing Agreement dated March 29, 2006 with THI, its former subsidiary, which governs the allocation of tax liabilities between the two companies. The income tax provision reflects this agreement.
The Company adopted SFAS No. 123R in the first quarter of 2006 and elected to calculate the pool of excess tax benefits under the alternative, or “short-cut” method.
| NOTE 6 | SHAREHOLDERS’ EQUITY |
On September 29, 2006, the Company completed its spin-off of THI, the parent company of the business formerly reported as the Hortons segment. The net assets of THI of $638.9 million (including accumulated translation adjustments of $112.2 million and a hedge fair value loss of $0.6 million in other comprehensive income) have been reflected as a final dividend paid out of retained earnings in 2006. The assets and liabilities of THI have been recorded in current assets and liabilities and non current assets and liabilities of discontinued operations as of January 1, 2006 (see Note 10 to the Consolidated Financial Statements).
On March 29, 2006, the Company completed its IPO of THI. A total of 33.4 million shares were offered at an initial per share price of $23.162 ($27.00 Canadian). The gross proceeds of $769.2 million were offset by $52.4 million in underwriter and other third party costs with all such costs paid as of October 1, 2006. As a result of the IPO, the Company recorded a $716.8 million increase to capital in excess of stated value. The shares sold in the IPO represented 17.25% of total THI shares issued and outstanding and the Company retained the remaining 82.75% of THI shares until it completed the spin-off described above. The IPO was reflected as an increase to capital in excess of total value in accordance with SAB No. 51, “Accounting for Sales of Stock of a Subsidiary”, because the Company expected to spin-off the remaining THI shares it held.
In each of 2002 and 2004, the Board of Directors approved an increase in the common stock repurchase program of up to an additional $200 million. In 2005, the Board of Directors approved another increase in the repurchase program of up to an additional $1 billion. On October 9, 2006 the Company’s Board of Directors authorized the repurchase of up to 35.4 million common shares of the Company. The October 9, 2006 authorization replaced all prior authorizations. At December 31, 2006, approximately 13 million shares remained under the share repurchase authorization. During 2006, 2005 and 2004, 26.2 million, 2.0 million and 3.6 million common shares were repurchased pursuant to the program and cash disbursements related to share repurchases totaled approximately $1.0 billion, $100 million and $138 million, respectively.
On October 18, 2006, the Company commenced a modified “Dutch Auction” tender offer to purchase up to 22.2 million of its outstanding common shares in a price range of $33.00 to $36.00 per share. The shares sought represented approximately 19% of the Company’s shares outstanding as of October 12, 2006. The tender offer expired on November 16, 2006. As a result of the tender offer, the Company purchased 22.4 million common shares at a price of $35.75, for a total purchase price of $804.4 million, which was reflected in the treasury stock component of shareholders’ equity, including $3.1 million of transaction costs.
In January 2006, 3.75 million common shares of the Company were repurchased under an accelerated share repurchase (“ ASR ”) transaction for an initial value of $207.0 million. The initial price paid per share as part of the ASR transaction was $55.21. The repurchased shares were also subject to a future contingent-purchase price adjustment based upon the weighted average repurchase price during the period through March 23, 2006. The ASR agreement included the option to settle the contract in cash or shares of the Company’s common stock and, accordingly, the contract was treated as an equity transaction. In March 2006, the contingent purchase price adjustment was determined to be $13.1 million and was paid by the Company. The total purchase price of $220.1 million was reflected in the treasury stock component of shareholders’ equity in the first quarter of 2006.
In 2005, 2.0 million common shares were repurchased under an ASR transaction for an initial value of approximately $98 million. The initial price paid per share as part of the ASR transaction was $49.10. The repurchased shares were also subject to a future contingent purchase price adjustment based upon the weighted
61
average repurchase price during the period from August 16, 2005 through September 16, 2005. The ASR agreement included the option to settle the contract in cash or shares of the Company’s common stock and, accordingly, the contract was classified in equity. In September 2005, the contingent purchase price adjustment was determined to be $0.5 million and was paid to the Company. The purchase price adjustment was reflected in the treasury stock component of shareholders’ equity in the third quarter of 2005. In 2004, 1.4 million shares were acquired in a similar ASR transaction under which approximately $53 million was paid by the Company in 2004 and approximately $2 million was paid by the Company in 2005 representing the contingent purchase price adjustment.
In accordance with SFAS No. 87, the Company has recorded a pretax minimum pension liability of $36.2 million ($22.5 million after tax). (See also Note 13 to the Consolidated Financial Statements).
Stock option awards made by the Company generally have a term of 10 years from the grant date and become exercisable in installments of 25% on each of the first four anniversaries of the grant date. As discussed in Note 1, during the fourth quarter of 2005 the Company accelerated the vesting of all outstanding options, excluding those held by outside directors. Restricted share grants made by the Company generally vest in increments of 25% on each of the first four anniversaries of the grant date. Restricted share grants to Canadian employees vest over a 30 month period. In accordance with the Company’s equity plan, with respect to the disposition of a subsidiary, outstanding restricted shares granted to Baja Fresh and U.S. THI employees vested at the time of the sale and spin-off, respectively. The Company’s restricted shares granted to Canadian THI employees were cancelled in May and August 2006 and the Canadian THI employees were granted THI restricted shares. The THI restricted share grants immediately vested and THI common shares were distributed to these THI employees under the THI 2006 Stock Incentive Plan.
Restricted shares generally have dividend participation rights under which dividends are reinvested in additional shares. The Company granted 0.1 million performance share awards in 2006 to certain key employees based on achieving Company earnings targets. These performance shares settle in restricted shares based on specified performance criteria and the earned restricted shares then generally vest over the following four years in installments of 25% each year. The number of remaining shares authorized under all of the Company’s equity plans, net of exercises, totaled 4.2 million as of December 31, 2006.
In accordance with the anti-dilution provisions in the Company’s equity plans, upon the spin-off of THI, all stock options, restricted stock units and performance shares were adjusted in order to retain the equivalent value to employees. In accordance with SFAS No. 123R, no compensation cost was recorded as a result of this adjustment. This adjustment is reflected in the following schedules. Restricted stock awards received the dividend of THI shares and therefore were not adjusted. The THI shares distributed to participants holding restricted stock awards are being held for the benefit of these participants and will be issued to participants in accordance with the normal vesting period of the underlying restricted stock awards.
Restricted shares
The following is a summary of unvested restricted share activity for 2006:
| (Shares in thousands) |
Restricted
Shares |
Weighted Average
Fair Value |
|||||
|
Balance at January 1, 2006 |
1,272 | $ | 41.77 | ||||
|
Granted |
342 | 61.42 | |||||
|
Vested |
(483 | ) | 42.35 | ||||
|
Canceled |
(534 | ) | 45.59 | ||||
|
Adjustment due to THI spin-off |
432 | (20.98 | ) | ||||
|
Balance at December 31, 2006 |
1,029 | $ | 29.02 | ||||
62
The adjustment due to the THI spin-off represents the impact of the conversion of the number of restricted shares based on the adjusted market price of the Company’s stock, excluding THI. The conversion was necessary in order to retain the total value granted to each employee after the spin-off of THI.
As of December 31, 2006, total unrecognized compensation cost related to nonvested share-based compensation was $20.4 million and is expected to be recognized over a weighted-average period of 2.1 years. The Company expects substantially all of its restricted shares to vest. The total fair value of restricted shares vested in 2006, 2005 and 2004 was $20.5 million, $4.7 million and $0.2 million, respectively. Approximately 0.9 million and 0.5 million restricted shares were granted in 2005 and 2004, respectively, at a weighted-average grant date fair value of $42.97 and $40.37, respectively.
Stock Options
The use of stock options is currently not a significant component of the Company’s equity compensation structure. The Company last granted stock options in 2004 and only approximately 26,000 stock options were unvested as of December 31, 2006.
The following is a summary of stock option activity for the year-to-date period ended December 31, 2006 :
| (Shares and aggregate intrinsic value in thousands) |
Shares Under Option |
Weighted Average Price Per Share |
Weighted Average Remaining Contractual Life |
Aggregate Intrinsic Value |
||||||||
|
Balance at January 1, 2006 |
4,535 | $ | 32.74 | 6.6 | ||||||||
|
Granted |
0 | 0 | ||||||||||
|
Exercised |
(3,639 | ) | 33.01 | |||||||||
|
Canceled |
(38 | ) | 33.09 | |||||||||
|
Adjustment due to THI spin-off |
915 | (16.31 | ) | |||||||||
|
Outstanding at December 31, 2006 |
1,773 | $ | 15.23 | 5.4 | $ | 31,662 | ||||||
|
Exercisable at December 31, 2006 |
1,747 | $ | 15.25 | 5.4 | $ | 31,160 | ||||||
The adjustment due to the THI spin-off represents the impact of the conversion of the number of options based on the adjusted market price of the Company’s stock, excluding THI. The conversion was necessary in order to retain the total value granted to each employee after the spin-off of THI.
No stock options were granted in 2005 and approximately 1.4 million stock options were granted in 2004 at a weighted average price per share of $40.56. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The total intrinsic value of stock options exercised was $99.6 million, $129.4 million and $18.9 million for 2006, 2005 and 2004, respectively. Proceeds from stock options exercised were $119.9 million, $215.9 million and $31.4 million for 2006, 2005 and 2004, respectively, and the tax benefit realized for tax deductions from stock options exercised totaled $25.4 million, $37.8 million and $6.2 million for 2006, 2005 and 2004, respectively.
The Company has a Shareholder Rights Plan (“ Rights Plan ”) under which one preferred stock purchase right (“ Right ”) was distributed as a dividend for each outstanding common share. Each Right entitles a shareholder to buy one ten-thousandth of a share of a new series of preferred stock for $100 upon the occurrence of certain events. Rights would be exercisable once a person or group acquires 15% or more of the Company’s common shares, or 10 days after a tender offer for 15% or more of the common shares is announced. No certificates will be issued unless the Rights Plan is activated.
Under certain circumstances, all Rights holders, except the person or company holding 15% or more of the Company’s common shares, will be entitled to purchase common shares at about half the price that such shares
63
traded for prior to the announcement of the acquisition. Alternatively, if the Company is acquired after the Rights Plan is activated, the Rights will entitle the holder to buy the acquiring company’s shares at a similar discount. The Company can redeem the Rights for one cent per Right under certain circumstances. If not redeemed, the Rights will expire on August 10, 2008.
| NOTE 7 | ACQUISITIONS AND INVESTMENTS |
In 2006, the Company acquired 12 Wendy’s restaurants in various markets from franchisees for $13.3 million. In 2005, the Company acquired 15 Wendy’s restaurants in various markets from franchisees for $13.3 million. In 2004, the Company acquired 14 Wendy’s restaurants in various markets for a total purchase price of $5.6 million. Goodwill acquired in connection with the Company’s acquisition of Wendy’s restaurants totaled $3.5 million, $5.5 million and $3.8 million for 2006, 2005 and 2004, respectively.
| NOTE 8 | DISPOSITIONS 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 of $15.5 million and $65.7 million as assets held for disposition in the Consolidated Balance Sheets as of December 31, 2006 and January 1, 2006, respectively. The assets are Wendy’s sites, are no longer being depreciated and have been classified as held for disposition based on the Company’s intention to sell these assets within the next 12 months. During the year ended December 31, 2006, 31 sites previously classified as held for disposition as of January 1, 2006 with a net book value of $23.6 million were reclassified from assets held for disposition to property and equipment because these sites are no longer intended to be sold to the previously identified purchasers and the Company elected to discontinue marketing the sites for sale. The effect on the Consolidated Statements of Income related to the reclassification of these sites from assets held for disposition was limited to depreciation expense and was not material. Also during 2006, certain additional sites and equipment were designated as held for disposition. These assets have a net book value of $23.5 million, net of $7.6 million in impairment charges recorded to reflect the net realizable value of these assets. At December 31, 2006, the net book value of assets held for disposition includes $10.7 million of land, $4.5 million of buildings and leasehold improvements and $0.3 million of equipment and other assets.
During the year ended December 31, 2006, the Company sold 70 sites and other equipment classified as held for disposition during 2006, with a net book value of $49.8 million, for a net gain of $8.2 million, of which $5.5 million is classified as other expense (income), net and $2.7 million is classified as franchise revenue.
In the fourth quarter of 2005, the Company completed the sale of 130 Wendy’s real estate properties to a third party for $119.1 million, resulting in a pretax gain of $46.2 million, which is included in other expense (income), net on the Consolidated Statements of Income. The Company also sold 37 Wendy’s real estate properties in 2005 to existing franchisees for $42.0 million, resulting in a pretax gain of $16.4 million, which is included in franchise revenues on the Consolidated Statements of Income.
In 2006 and 2005, the Company incurred $16.7 million and $22.6 million, respectively, of store closing and asset impairment charges, which are included in other expense (income), net on the Consolidated Statements of Income. In 2005, the charge primarily related to the closure of 47 underperforming Wendy’s restaurants. Total store closing costs included asset write-offs and lease termination costs. There were no store closing costs incurred in 2004.
| NOTE 9 | RESTRUCTURING RESERVES |
In the first quarter of 2006, the Company announced its plans to reduce general and administrative and other costs $100 million, including $80 million in the continuing Wendy’s business. In order to accomplish this, the Company offered a voluntary enhanced retirement plan to certain full-time employees who were 55 years of age
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and had at least 10 years of service. Benefits primarily included severance and healthcare coverage. In accordance with SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, in 2006, the Company recorded $16.5 million in charges related to the individuals that accepted the offer. This amount also includes $2.5 million of additional stock compensation expense for unvested restricted stock units resulting from the acceleration of vesting to the employees’ retirement dates, in accordance with the Company’s stock compensation plan. In the fourth quarter of 2006, the Company recognized a $3.9 million settlement charge as a result of distributions from the Company’s defined benefit pension plan, primarily related to those individuals who participated in the voluntary enhanced retirement plan (see also Note 13 to the Consolidated Financial Statements).
In the second quarter of 2006, the Company initiated a reduction in force, also intended to contribute to the cost reductions. In accordance with SFAS No. 112, “Employers’ Accounting for Postemployment Benefits”, in 2006 the Company recorded severance and related costs of $13.3 million related to this reduction in force, which includes $4.1 million of severance costs related to certain senior executives who left the Company in 2006. Substantially all of the $13.3 million of costs began being paid in the third quarter of 2006 and will continue through 2007. Approximately $1.0 million of these costs represented additional stock compensation expense related to the modification of stock-based equity awards. In the third quarter of 2006, the Company revised its estimate related to the expected payout for certain employees included in the reduction in force. This revision of estimates resulted in a reduction of expense of $1.9 million.
In addition to the employee related costs above, the Company incurred professional fees of $3.6 million in 2006 in connection with the cost reduction initiatives described above, all of which have been paid. Also, the Company incurred $1.9 million in relocation and employee benefit costs in the 2006 associated with the cost reduction initiatives, the significant majority of which have been paid. These amounts are included in professional fees and other in the table below.
All of the above restructuring costs are included in the other expense (income), net line of the Consolidated Condensed Statements of Income (see also Note 1 to the Consolidated Financial Statements).
The table below presents a reconciliation of the beginning and ending restructuring liabilities at January 1, 2006 and December 31, 2006, respectively :
| (In thousands) |
Enhanced Retirement |
Reduction in Force |
Professional Fees and Other |
Total | ||||||||||||
|
Balance at January 1, 2006 |
$ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
|
Expensed during the year |
14,179 | 11,386 | 5,601 | 31,166 | ||||||||||||
|
Paid during the year |
(13,925 | ) | (3,035 | ) | (5,460 | ) | (22,420 | ) | ||||||||
|
Adjustments |
(236 | ) | (1,853 | ) | 0 | (2,089 | ) | |||||||||
|
Balance at December 31, 2006 |
$ | 18 | $ | 6,498 | $ | 141 | $ | 6,657 | ||||||||
| NOTE 10 | DISCONTINUED OPERATIONS |
THI
On September 29, 2006, the Company completed the distribution of its remaining 82.75% ownership in THI. The distribution took place in the form of a pro rata common stock dividend to Wendy’s shareholders whereby each shareholder received 1.3542759 shares of THI common stock for each share of Wendy’s common stock held (see also Note 6 to the Consolidated Financial Statements).
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The table below presents the significant components of THI operating results included in income from discontinued operations for 2006, 2005 and 2004. THI represented the Hortons segment prior to the spin-off.
| (In thousands) | 2006 | 2005 | 2004 | ||||||
|
Revenues |
$ | 1,040,945 | $ | 1,185,264 | $ | 995,638 | |||
|
Income before income taxes |
$ | 232,692 | $ | 242,405 | $ | 237,199 | |||
|
Income tax expense |
48,605 | 75,060 | 78,285 | ||||||
|
Minority interest expense |
23,603 | 0 | 0 | ||||||
|
Income from discontinued operations, net of tax |
$ | 160,484 | $ | 167,345 | $ | 158,914 | |||
The assets and liabilities of THI reflected as discontinued operations in the consolidated balance sheet as of January 1, 2006 are shown below. No assets or liabilities of THI are included in the consolidated balance sheet as of December 31, 2006.
| (In thousands) | January 1, 2006 | ||
|
Cash |
$ | 160,115 | |
|
Accounts receivable, net |
73,698 | ||
|
Notes receivable, net |
9,929 | ||
|
Deferred income taxes |
3,375 | ||
|
Inventories and other |
32,108 | ||
|
Restricted assets |
16,375 | ||
|
Assets held for disposition |
1,110 | ||
|
Total current assets |
$ | 296,710 | |
|
Property and equipment, net |
$ | 910,869 | |
|
Notes receivable, net |
12,936 | ||
|
Intangible assets, net |
3,630 | ||
|
Other non current assets |
93,556 | ||
|
Total non current assets |
$ | 1,020,991 | |
|
Accounts payable |
$ | 92,967 | |
|
Accrued liabilities |
67,065 | ||
|
Restricted liabilities |
31,439 | ||
|
Other current liabilities |
60,138 | ||
|
Total current liabilities |
$ | 251,609 | |
|
Term debt |
$ | 37,253 | |
|
Capital leases |
38,400 | ||
|
Deferred income taxes |
1,400 | ||
|
Other long term liabilities |
29,724 | ||
|
Total non current liabilities |
$ | 106,777 | |
Impairment Charges
Under SFAS No. 142, goodwill and other indefinite-lived intangibles must be tested for impairment annually (or in interim periods if events indicate possible impairment). In the fourth quarter of 2005, the Company tested goodwill for impairment and recorded an impairment charge of $25.4 million related to the THI U.S. business. The Company determined the amount of the charge based on an estimate of the fair market value of the reporting unit based on historical performance and discounted cash flow projections. Lower than anticipated sales levels and lower store development expectations were the primary considerations in the determination that the recorded goodwill value was impaired. The impairment charges fully eliminated the balance of goodwill related to THI.
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In 2005, a pretax asset impairment charge of $18.5 million was recorded related to two THI markets in New England that were acquired in 2004 as part of the Bess Eaton acquisition. These markets were underperforming despite various strategies employed to improve performance. The fair value of this market was determined based on the estimated realizable value of the fixed assets using third party appraisals.
Derivatives
In the third quarter of 2005, THI entered into forward currency contracts that matured in March 2006 to sell Canadian dollars and buy $427.4 million U.S. dollars to hedge the repayment of cross-border intercompany notes being marked-to-market beginning in the third quarter of 2005. Previously, the translation of these intercompany notes was recorded in comprehensive income (expense), rather than in the Consolidated Statements of Income, in accordance with SFAS No. 52, “Foreign Currency Translation”. The fair value unrealized loss on these contracts as of January 1, 2006 was $3.2 million. On the maturity date of March 3, 2006, THI received $427.4 million from the counterparties and disbursed to the counterparties the U.S. dollar equivalent of $500.0 million Canadian, resulting in a net U.S. dollar cash flow of $13.1 million to the counterparties. Per SFAS No. 95, “Statement of Cash Flows”, the net U.S. dollar cash flow is reported in the net cash provided by operating activities of discontinued operations line of the 2006 Consolidated Statements of Cash Flows. These forward currency contracts remained highly effective cash flow hedges and qualified for hedge accounting treatment through their maturity. As a result, during the first quarter of 2006, changes in the fair value of the effective portion of these foreign currency contracts offset changes in the cross-border intercompany notes and a $0.8 million gain was recognized as the ineffective portion of the foreign currency contracts in discontinued operations in the Consolidated Statements of Income.
In the fourth quarter of 2005, THI entered into forward currency contracts to sell Canadian dollars and buy $490.5 million U.S. dollars in order to hedge certain net investment positions in Canadian subsidiaries. On the maturity dates in April 2006, THI received $490.5 million U.S. from the counterparties and disbursed to the counterparties the U.S. dollar equivalent of $578.0 million Canadian, resulting in a net U.S. dollar cash flow of $14.9 million to the counterparties. Per SFAS No. 95, the net U.S. dollar cash flow is reported in the net cash provided by operating activities from discontinued operations line of the 2006 Consolidated Statements of Cash Flows. The fair value unrealized loss on these contracts was $5.0 million, net of taxes of $3.0 million, as of January 1, 2006. Changes in the fair value of these foreign currency net investment hedges are included in the translation adjustments line of other comprehensive income. These forward contracts remained highly effective hedges and qualified for hedge accounting treatment through their maturity. No amounts related to these net investment hedges were reclassified into earnings.
Debt
On February 28, 2006, THI entered into an unsecured five-year senior bank facility with a syndicate of Canadian and U.S. financial institutions that comprises a $300 million Canadian dollar term-loan facility; a $200 million Canadian dollar revolving credit facility (which includes $15 million in overdraft availability); and a $100 million U.S. dollar revolving credit facility (together referred to as the “ senior bank facility ”). The senior bank facility is an obligation of THI only, and not of the Company. The term loan facility bears interest at a variable rate per annum equal to Canadian prime rate or alternatively, THI may elect to borrow by way of Bankers’ Acceptances (or loans equivalent thereto) plus a margin. On February 28, 2006, THI also entered into an unsecured non-revolving $200 million Canadian dollar bridge loan facility. The bridge loan facility had interest at Bankers’ Acceptances plus a margin. Outstanding borrowings of $200 million Canadian at April 2, 2006 were repaid on May 3, 2006 and the bridge facility was terminated as a result of the voluntary prepayment. In connection with the term-loan facility, THI entered into a $100 million Canadian dollar interest rate swap on March 1, 2006 to help manage its exposure to interest rate volatility. The interest rate swap essentially fixed the interest rate on one third of the $300 million Canadian dollar term loan facility to 5.175% and matures on February 28, 2011.
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Income Taxes
The decrease in 2006 tax expense as a percent of pretax income primarily reflects the resolution of certain THI tax audits in the second quarter 2006.
Baja Fresh
On November 28, 2006, the Company completed the sale of Baja Fresh for net cash proceeds of $25.0 million, net of costs associated with the sale, resulting in a loss of $2.1 million, which is included in discontinued operations, net of tax on the Consolidated Statements of Income. The recorded loss on sale may be subject to certain post-close adjustments according to the sale agreement. Accordingly, the results of operations of Baja Fresh are reflected as discontinued operations for all periods presented.
The table below presents the significant components of Baja Fresh operating results included in income from discontinued operations for 2006, 2005 and 2004.
| (In thousands) | 2006 | 2005 | 2004 | |||||||||
|
Revenues |
$ | 147,736 | $ | 172,095 | $ | 176,213 | ||||||
|
Loss before income taxes |
$ | (147,492 | ) | $ | (20,692 | ) | $ | (227,116 | ) | |||
|
Income tax benefit |
(52,852 | ) | (5,319 | ) | (15,530 | ) | ||||||
|
Income (loss) from discontinued operations, net of tax |
$ | (94,640 | ) | $ | (15,373 | ) | $ | (211,586 | ) | |||
The assets and liabilities of Baja Fresh reflected as discontinued operations in the consolidated balance sheet as of January 1, 2006 are shown below. No assets or liabilities of Baja Fresh are included in the consolidated balance sheet as of December 31, 2006.
| (In thousands) | January 1, 2006 | ||
|
Cash |
$ | 92 | |
|
Accounts receivable, net |
2,840 | ||
|
Deferred income taxes |
1,821 | ||
|
Inventories and other |
2,509 | ||
|
Restricted assets |
1,840 | ||
|
Total current assets |
$ | 9,102 | |
|
Property and equipment, net |
$ | 59,311 | |
|
Deferred income taxes |
0 | ||
|
Goodwill |
46,933 | ||
|
Intangible assets, net |
29,797 | ||
|
Other non current assets |
527 | ||
|
Total non current assets |
$ | 136,568 | |
|
Accounts payable |
$ | 2,419 | |
|
Accrued liabilities |
4,762 | ||
|
Restricted liabilities |
1,840 | ||
|
Other current liabilities |
2,976 | ||
|
Total current liabilities |
$ | 11,997 | |
|
Term debt |
$ | 44 | |
|
Deferred income taxes |
4,618 | ||
|
Other non current liabilities |
5,147 | ||
|
Total non current liabilities |
$ | 9,809 | |
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Impairment Charges
In the third quarter 2006, the Company recorded pretax intangible and fixed asset impairment charges of $8.9 million ($5.5 million after-tax) using the held for sale model in accordance with SFAS No. 144. The impairment was required in the third quarter based on new market data received. The impairment charges are included in the income from discontinued operations line of the Consolidated Statements of Income
During the second quarter of 2006, as a result of continuing poor sales performance at Baja Fresh and the Company’s consideration of alternatives for the Baja Fresh business, the Company tested goodwill of Baja Fresh for impairment in accordance with SFAS No. 142 and tested other intangibles and fixed assets in accordance with SFAS No. 144 using the held and used model, and recorded a Baja Fresh goodwill pretax impairment charge of $46.9 million ($46.1 million after-tax), a Baja Fresh impairment charge of $25.8 million ($16.0 million after-tax) related to the Baja Fresh trade name and $49.8 million ($30.9 million after-tax) in Baja Fresh fixed asset impairment charges. The amount of the charges was determined using a probability-based approach using discounted cash flows and market data.
In the fourth quarter of 2004, the Company tested goodwill for impairment and recorded a pretax impairment charge of $190.0 million ($186.6 million after-tax) related to Baja Fresh. The Company, with the assistance of an independent third-party, determined the amount of the charge based on an estimate of the fair value of Baja Fresh, which was primarily based on comparative market data. The declining average same-store sales for Baja Fresh both in 2004 and 2003 were a significant consideration in the determination that the recorded value of Baja Fresh goodwill was impaired.
In 2004, as a result of a continuing trend of negative cash flows and poor sales performance at Baja Fresh, the Company recognized pretax store closure and fixed asset impairment charges of $21.7 million. Store closure charges of $9.5 million included $4.1 million of lease termination costs and $5.4 million related primarily to fixed asset write-offs. Fixed asset impairment charges for eight markets totaled $12.2 million, which were based on fair value estimates using discounted cash flows for four of the markets and expected realizable value for four of the markets to be exited.
Taxes
Included in 2006 discontinued operations is a net tax benefit of approximately $11.5 million to recognize the outside book versus tax basis differential on the sale of the stock of Baja Fresh. The $11.5 million represents the tax benefit of capital losses which can be carried back. The capital loss on the sale which will be carried forward (approximately $218 million) has a full valuation allowance associated with it. In order to utilize the capital loss in the five-year carry forward period, the Company must generate capital gain income. The Company has reviewed various SFAS No. 109 tax planning strategies, including sale and leasebacks, which might be used to realize the benefit of these loss carryforwards. These strategies, at this time, do not meet the “prudent and feasible” criteria of SFAS No. 109 and accordingly the valuation allowance has been recorded.
Cafe Express
In the fourth quarter of 2006, the Company’s Board of Directors approved the future sale of Cafe Express which was historically included in the Developing Brands segment. Accordingly, the results of operations of Cafe Express are reflected as discontinued operations for all periods presented. In addition, the assets and liabilities of Cafe Express were held for sale at December 31, 2006 and are presented as current and non current assets and liabilities from discontinued operations at December 31, 2006 and January 1, 2006.
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The table below presents the significant components of Cafe Express operating results included in income from discontinued operations for 2006, 2005 and 2004.
| (In thousands) | 2006 | 2005 | 2004 | |||||||||
|
Revenues |
$ | 32,327 | $ | 31,996 | $ | 30,486 | ||||||
|
Loss before income taxes |
(13,620 | ) | (20,433 | ) | (2,211 | ) | ||||||
|
Income tax benefit |
(5,042 | ) | (7,433 | ) | (774 | ) | ||||||
|
Loss from discontinued operations, net of tax |
$ | (8,578 | ) | $ | (13,000 | ) | $ | (1,437 | ) | |||
The assets and liabilities of Cafe Express are reflected as discontinued operations in the Consolidated Balance Sheets as of December 31, 2006 and January 1, 2006 and are comprised of the following:
| (In thousands) | December 31, 2006 | January 1, 2006 | ||||
|
Cash |
$ | 2,273 | $ | 2,474 | ||
|
Accounts receivable, net |
124 | 272 | ||||
|
Inventories and other |
315 | 269 | ||||
|
Total current assets |
$ | 2,712 | $ | 3,015 | ||
|
Property and equipment, net |
$ | 350 | $ | 7,233 | ||
|
Intangible assets, net |
180 | 3,487 | ||||
|
Other non current assets |
495 | 329 | ||||
|
Total non current assets |
$ | 1,025 | $ | 11,049 | ||
|
Accounts payable |
$ | 1,476 | $ | 755 | ||
|
Accrued Liabilities |
742 | 422 | ||||
|
Total current liabilities |
$ | 2,218 | $ | 1,177 | ||
|
Other non current liabilities |
1,519 | 1,450 | ||||
|
Total non current liabilities |
$ | 1,519 | $ | 1,450 | ||
Impairment Charges
Based on available market data related to Cafe Express, in the fourth quarter of 2006 in accordance with SFAS No. 144, the Company tested fixed asset and intangible assets for impairment using the held for sale model, and recorded Cafe Express pretax impairment charges of $4.0 million ($2.4 million after-tax). The charges were determined using a probability-based approach using discounted cash flows and market data.
Based on available market data related to Cafe Express, in the third quarter of 2006 in accordance with SFAS No. 144, the Company tested fixed asset and intangible assets for impairment using the held and used model and recorded a pretax impairment charge of $1.8 million ($1.1 million after-tax) related to the Cafe Express trade name and other intangible assets and $3.4 million ($2.1 million after-tax) related to certain Cafe Express fixed assets. The Company used a probability-weighted approach based on available market data and sales performance of the Cafe Express business.
Under SFAS No. 142, goodwill and other indefinite-lived intangibles must be tested for impairment annually (or in interim periods if events indicate possible impairment). In the fourth quarter of 2005, the Company tested goodwill for impairment and recorded an impairment charge of $10.7 million related to Cafe Express. The Company determined the amount of the charge based on an estimate of the fair market value of the reporting unit based on historical performance and discounted cash flow projections. Lower than anticipated sales levels and lower store development expectations were the primary considerations in the determination that the recorded goodwill value for Cafe Express was impaired. The impairment charge fully eliminated the balance of goodwill related to Cafe Express.
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In 2005, a pretax asset impairment charge of $4.9 million was recorded related to an underperforming Cafe Express market. The fair value of the market was determined based on the estimated salvage value of the assets.
| NOTE 11 CASH | FLOWS |
In order to maintain comparability between periods, intercompany cash flows have been eliminated from the appropriate cash flow lines in the Company’s Consolidated Statements of Cash Flows. During 2006, intercompany cash flows were comprised of $985.6 million in net cash payments made by THI to Wendy’s and included $960.0 million for the repayment of an intercompany note. The $960.0 million payment has been eliminated as a cash outflow from discontinued operations financing activities and as a cash inflow from continuing operations financing activities, respectively. Intercompany cash flows also included payments made by THI to Wendy’s totaling $25.6 million in intercompany interest, intercompany trade payables and taxes. These payments have been eliminated as a cash outflow from discontinued operations’ operating activities and as a cash inflow from continuing operations’ operating activities, respectively.
Intercompany cash flows for 2006 also included net cash payments from Wendy’s to Baja Fresh for $4.2 million and $0.9 million from Wendy’s to Cafe Express for intercompany trade payables and taxes. These payments have been eliminated as a cash outflow from continuing operations’ operating activities and as a cash inflow from discontinued operations’ operating activities, respectively.
During 2005, intercompany cash flows included $51.3 million in net cash payments made by THI to Wendy’s. These included $17.9 million in cash paid by THI to Wendy’s as loans to Wendy’s, $64.7 million in cash paid by THI to Wendy’s for the repayment of borrowings from Wendy’s and $31.3 million in net cash paid by Wendy’s to THI comprised of intercompany interest, intercompany trade payables and taxes. As described above for the 2006 cash flows, each of these amounts was eliminated and is not reflected in the cash flow activity for continuing operations or discontinued operations in the investing, financing or operating sections of the Company’s Consolidated Statement of Cash Flow for 2005.
Similarly, during 2005, Baja Fresh made net payments of $2.0 million to Wendy’s and Wendy’s made net payments of $4.7 million to Cafe Express for intercompany trade payables and taxes that were eliminated and are not reflected in the cash flow activity for continuing operations or discontinued operations in cash flows from operating activities in the Consolidated Statement of Cash Flow for 2005.
During 2004, intercompany cash flows included $48.9 million in net cash payments made by THI to Wendy’s and included $99.5 million in cash paid by THI to Wendy’s as loans to Wendy’s, $40.5 million in cash paid by THI to Wendy’s for the repayment of borrowings from Wendy’s, $41.5 million in cash paid by Wendy’s to THI as loans to THI, and $49.6 million in net cash paid by Wendy’s to THI comprised of intercompany interest, intercompany trade payables and taxes. As described above for the 2006 cash flows, each of these amounts was eliminated and is not reflected in the cash flow activity for continuing operations or discontinued operations in the investing, financing or operating sections of the Company’s Consolidated Statement of Cash Flow for 2004.
Similarly, during 2004, Wendy’s made net payments of $26.0 million to Baja Fresh and $2.6 million to Cafe Express for intercompany trade payables and taxes that were eliminated and are not reflected in the cash flow activity for continuing operations or discontinued operations in the operating section. Also during 2004, Wendy’s made a payment of $13.8 million to Cafe Express for the payment of Cafe Express’ third party debt. This payment was eliminated and is not reflected in the cash flow activity for continuing operations or discontinued operations in cash flows from operating activities.
| NOTE 12 COMMITMENTS | AND CONTINGENCIES |
At December 31, 2006 and January 1, 2006, the Company’s reserves established for doubtful royalty receivables were $3.1 million and $3.1 million, respectively. Reserves related to possible losses on notes receivable, real
71
estate, guarantees, claims and contingencies involving franchisees totaled $7.4 million and $7.4 million at December 31, 2006 and January 1, 2006, respectively. These reserves are included in accounts receivable, notes receivable and other accrued expenses.
The Company has guaranteed certain leases and debt payments, primarily related to franchisees, amounting to $171.3 million for the continuing Wendy’s business. In the event of default by a franchise owner, the Company generally retains the right to acquire possession of the related restaurants. The Company is contingently liable for certain leases for the continuing Wendy’s business amounting to an additional $21.3 million. These leases have been assigned to unrelated third parties, who have agreed to indemnify the Company against future liabilities arising under the leases. These leases expire on various dates through 2022. The Company is also the guarantor on $6.7 million in letters of credit with various parties for the continuing Wendy’s business, 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.
The Company is self-insured for most domestic workers’ compensation, general liability and automotive liability losses subject to per occurrence and aggregate annual liability limitations. The Company is also self-insured for health care claims for eligible participating employees subject to certain deductibles and limitations. The Company determines its liability for claims incurred but not reported on an actuarial basis.
The Company has entered into long-term purchase agreements with some of its suppliers. The range of prices and volume of purchases under the agreements may vary according to the Company’s demand for the products and fluctuations in market rates. These agreements help the Company secure pricing and product availability. The Company does not believe these agreements expose the Company to material risk.
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. 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 45 and based on available information, the Company has accrued for certain guarantees and indemnities as of December 31, 2006 and January 1, 2006 which, in total, are not material.
The Company and its subsidiaries are parties to various legal actions and complaints arising in the ordinary course of business. Many of these are covered by the Company’s self-insurance or other insurance programs. Reserves related to the resolution of legal proceedings are included in accrued expenses other. It is the opinion of the Company that the ultimate resolution of such matters will not materially affect the Company’s financial condition or earnings.
| NOTE 13 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 Wendy’s International, Inc. and certain subsidiaries that have adopted the Plans.
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
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January 1, 2007, no new participants will enter the ABP Plan, although participant account balances will continue to receive interest credits of approximately 6% in 2007 on existing account balances. Company benefits credited to ABP Plan participant accounts which were historically made based on a percentage of participant salary and years of service will no longer be made beginning January 1, 2007. Freezing of the ABP Plan was accounted for as a curtailment in the first quarter of 2006 under SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, and during the first quarter, the Company recorded a $0.1 million curtailment charge related to service cost unrecognized prior to freezing the ABP Plan. In the fourth quarter of 2006, the Company decided to terminate the Plans. The Company has requested or intends to request, termination determination letters on the Plans from the IRS and approval of the termination by the Pension Benefit Guaranty Corporation. Once approved, the Company intends to distribute individual account balances or purchase annuities to settle the account balances.
The change in the projected benefit obligation for the Plans for 2006 and 2005 consisted of the following:
| (In thousands) | 2006 | 2005 | ||||||
|
Balance at beginning of year |
$ | 108,179 | $ | 96,811 | ||||
|
Service cost |
6,034 | 5,570 | ||||||
|
Interest cost |
5,767 | 5,639 | ||||||
|
Assumption change |
0 | 7,014 | ||||||
|
Actuarial loss—related to freezing the ABP Plan |
11,669 | 1,549 | ||||||
|
Curtailments—related to freezing the ABP Plan |
(10,419 | ) | 0 | |||||
|
Settlements |
(11,376 | ) | 0 | |||||
|
Benefits and expenses paid |
(9,539 | ) | (8,404 | ) | ||||
| $ | 100,315 | $ | 108,179 | |||||
The change in fair value of plan assets for each year consisted of the following:
| (In thousands) | 2006 | 2005 | ||||||
|
Balance at beginning of year |
$ | 108,080 | $ | 100,436 | ||||
|
Actual return on plan assets |
8,707 | 5,541 | ||||||
|
Company contributions |
2,239 | 10,507 | ||||||
|
Settlements |
(11,376 | ) | 0 | |||||
|
Benefits and expenses paid |
(9,539 | ) | (8,404 | ) | ||||
| $ | 98,111 | $ | 108,080 | |||||
The reconciliation of the funded status to the net amount recognized in the Consolidated Balance Sheets at each year-end consisted of the following:
| (In thousands) | 2006 | 2005 | ||||||
|
Funded status |
$ | (2,203 | ) | $ | (98 | ) | ||
|
Unrecognized actuarial loss |
36,244 | 43,406 | ||||||
|
Unrecognized prior service cost |
0 | (323 | ) | |||||
|
Prepaid benefit cost |
$ | 34,041 | $ | 42,985 | ||||
In accordance with SFAS No. 87, “Employers’ Accounting for Pensions”, the Company recorded a pretax minimum pension liability of $36.2 million ($22.5 million after tax) through other comprehensive income at December 31, 2006.
In accordance with the transition disclosure requirements of SFAS No. 158, “ Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans- an amendment of FASB Statements No. 87, 88, 106, and 132R ” , the Company has determined that the incremental effect of applying SFAS No. 158 at December 31, 2006 was to reduce both the prepaid pension asset and the long-term pension liability by $34.0 million. The prepaid pension asset was included in other assets and the long-term pension liability is classified in other long-term liabilities on the Consolidated Balance Sheet.
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The amount recognized in Accumulated Other Comprehensive Income consists of:
| (In thousands) | 2006 | |||
|
Unfunded liability, net of tax of $833 |
$ | (1,370 | ) | |
|
Prepaid benefit cost, net of tax of $12,865 |
(21,176 | ) | ||
|
Accumulated other comprehensive income (expense), net of tax |
$ | (22,546 | ) | |
Other comprehensive income for each of the last three years included the following income (expense), net of tax:
| (In thousands) | 2006 | 2005 | 2004 | ||||||||
|
Pension liability |
$ | (21,450 | ) | $ | (183 | ) | $ | 105 | |||
Net periodic pension cost (credit) for each of the last three years consisted of the following:
| (In thousands) | 2006 | 2005 | 2004 | |||||||||
|
Service cost |
$ | 6,034 | $ | 5,570 | $ | 5,002 | ||||||
|
Interest cost |
5,767 | 5,639 | 5,067 | |||||||||
|
Expected return on plan assets |
(8,004 | ) | (7,755 | ) | (7,156 | ) | ||||||
|
Amortization of prior service cost |
(438 | ) | (1,067 | ) | (1,067 | ) | ||||||
|
Amortization of net loss |
3,598 | 3,119 | 2,438 | |||||||||
|
Settlements |
4,111 | 0 | 0 | |||||||||
|
Curtailments |
115 | 0 | 0 | |||||||||
|
Net periodic pension cost |
$ | 11,183 | $ | 5,506 | $ | 4,284 | ||||||
In 2007, assuming the Plans are not terminated (see below), the Company expects to recognize amortization of
Assumptions
Weighted-average assumptions used to determine benefit obligations at each of the last three years:
| 2006 | 2005 | 2004 | ||||
|
Discount rate |
5.30% | 5.50% | 6.00% | |||
|
Rate of compensation increase |
N/A (1) |
age-graded
scale |
age-graded
scale |
| (1) | This assumption is no longer applicable based upon the Company’s decision to freeze the Plans. |
Weighted-average assumptions used to determine net periodic benefit cost at each of the last three years:
| 2006 | 2005 | 2004 | ||||
|
Discount rate |
5.50% | 6.00% | 6.00% | |||
|
Expected long-term return on plan assets |
7.75% | 7.75% | 7.75% | |||
|
Rate of compensation increase |
age-graded
scale |
age-graded
scale |
age-graded
scale |
The Plans’ measurement date was December 31st for each respective year.
The discount rates used above are determined using various market indicators and reflect the available cost in the marketplace of settling all pension obligations. The 5.3% discount rate was selected based upon annuity purchase rates. Based upon the decision to freeze and subsequently terminate the Plans, the Company determined that long-term bond rates previously used were no longer commensurate with the expected cash flows of the Plans. Annuity purchase rates are more indicative of the expected return through the duration of the Plans.
74
Historically, the return on plan assets was determined using the Company’s investment mix between debt and equity securities, which had remained relatively constant year over year, and anticipated capital market returns.
Plans’ assets
The Plans’ assets are comprised primarily of money market funds, which are considered a cash equivalent. The Plans’ weighted-average asset allocations at December 31, 2006 and January 1, 2006, by asset category are as follows:
| Plans’ Assets | 2006 | 2005 | ||||
|
Equity securities |
0 | % | 57 | % | ||
|
Debt securities |
0 | % | 39 | % | ||
|
Cash and cash equivalents |
100 | % | 4 | % | ||
| 100 | % | 100 | % |
According to the Plans’ investment policy, the Plans may only invest in debt and equity securities and cash and cash equivalents. In the fourth quarter of 2006, the Company moved all of the Plans’ assets from debt and equity securities to money market funds in order to reduce investment risk and preserve the value of the assets in anticipation of the liquidation of the Plans.
Other retirement plans
The Company has a domestic profit sharing and savings plan. This plan covers certain qualified employees as defined in the applicable plan document. Effective January 1, 2001, the profit sharing and savings plan includes employer participation in accordance with the provisions of Section 401(k) of the Internal Revenue Code. The plan allows participants to make pretax contributions and the Company matches between 1% and 4% of employee contributions depending on the employee’s contribution percentage. The profit sharing portion of the plan is discretionary and non-contributory. All amounts contributed to the plan are deposited into a trust fund administered by an independent trustee. The Company’s matching 401(k) contributions totaled $9.2 million for 2006, $8.6 million for 2005 and $8.8 million for 2004.
The Company also provided for other profit sharing and supplemental retirement benefits under other defined contribution plans in the amounts of approximately $3 million, $5 million and $5 million for 2006, 2005 and 2004, respectively.
Cash flows
The Company makes contributions to the Plans in amounts sufficient, on an actuarial basis, to fund at a minimum, the Plans’ normal cost on a current basis, and to fund the actuarial liability for past service costs in accordance with Department of Treasury Regulations. The Company may make contributions of up to $10 million to its pension plans in 2007 unless approval to terminate the Plans is received, in which case the Company may be required to make additional contributions to the Plans of up to $25 million in order to make required distributions to settle plan participant account balances. When the Plans are terminated, the Company would expect to recognize pretax settlement charges of $34 million to $60 million.
Assuming the Plans are not terminated, estimated benefit payments for the next 10 years, which reflect expected future service, as appropriate, are shown below. These estimates are based on historical experience and are highly dependent on certain assumptions such as future pension asset performance and the timing of employees leaving the Company or retiring and are subject to change. If a favorable determination letter is received from the IRS, the Company expects to fully settle plan participant accounts within 120 days of receiving such letter.
75
| (In thousands) |
Estimated
benefit payments |
||
|
2007 |
$ | 7,382 | |
|
2008 |
8,323 | ||
|
2009 |
9,349 | ||
|
2010 |
8,456 | ||
|
2011 |
9,554 | ||
|
Years 2012 to 2016 |
54,352 | ||
| NOTE 14 ADVERTISING | COSTS AND FUNDS |
The Company participates in two advertising funds established to collect and administer funds contributed for use in advertising and promotional programs designed to increase sales and enhance the reputation of the Company and its franchise owners. Separate advertising funds are administered for Wendy’s U.S. and Wendy’s of Canada. In accordance with SFAS No. 45, “Accounting for Franchisee Fee Revenue”, the revenue, expenses and cash flows of the advertising funds are not included in the Company’s Consolidated Statements of Income or Consolidated Statements of Cash Flows because the contributions to these advertising funds are designated for specific purposes, and the Company acts as an, in substance, agent with regard to these contributions. The assets held by these advertising funds are considered restricted. The current restricted assets and related restricted liabilities are identified on the Company’s Consolidated Balance Sheets. In addition, the Wendy’s U.S. advertising fund has debt which is classified in current liabilities on the December 31, 2006 Consolidated Balance Sheet (see also Note 3 to the Consolidated Financial Statements).
Contributions to the advertising funds are required to be made from both company operated and franchise restaurants and are based on a percent of restaurant retail sales. In addition to the contributions to the various advertising funds, Company and franchise restaurants make additional contributions for local and regional advertising programs.
The following table summarizes the contribution rates, as a percent of restaurant retail sales, to the advertising funds for franchise and company operated units as of the end of the fiscal years 2006, 2005 and 2004:
| Contribution Rate | |||
|
Wendy’s U.S. |
3.00 | % | |
|
Wendy’s Canada (1) |
2.75 | % |
| (1) | Excluding Quebec, where all advertising is done locally. |
Company contributions to the two advertising funds totaled $85.8 million, $60.5 million and $62.4 million in 2006, 2005 and 2004, respectively. The 2006 contributions included a $25.0 million contribution to Wendy’s U.S. advertising fund made by the Company. The total amount spent by the two advertising funds in 2006, 2005 and 2004 amounted to $281.3 million, $278.0 million and $263.8 million, respectively.
Total advertising expense of the Company, net of reimbursements for incremental costs incurred by the Company on behalf of the advertising funds, and including amounts contributed to all of the advertising funds, local advertising costs and other marketing and advertising expenses, amounted to $134.1 million, $99.5 million and $101.3 million in 2006, 2005 and 2004, respectively.
| NOTE 15 SEGMENT | REPORTING |
The Company operates exclusively in the food-service industry and has determined that its reportable segments are those that are based on the Company’s methods of internal reporting and management structure. In 2006, as a result of the spin-off of THI, sale of Baja Fresh and future sale of Cafe Express, the results of the previously
76
disclosed Hortons and Developing Brands segments are included in discontinued operations (see Note 10 to the Consolidated Financial Statements) and are therefore no longer included as reportable segments of the Company. The Company has determined that the Wendy’s brand is the Company’s only remaining reportable segment.
Revenues and long-lived asset information by geographic area follows:
| (In thousands) | U.S. | Canada |
Other International |
Total | ||||||||
|
2006 |
||||||||||||
|
Revenues |
$ | 2,196,949 | $ | 226,502 | $ | 15,826 | $ | 2,439,277 | ||||
|
Long-lived assets |
1,170,609 | 54,329 | 1,390 | 1,226,328 | ||||||||
|
2005 |
||||||||||||
|
Revenues |
$ | 2,223,030 | $ | 218,091 | $ | 14,297 | $ | 2,455,418 | ||||
|
Long-lived assets |
1,199,957 | 147,080 | 1,437 | 1,348,474 | ||||||||
|
2004 |
||||||||||||
|
Revenues |
$ | 2,284,772 | $ | 203,572 | $ | 13,814 | $ | 2,502,158 | ||||
Revenues consisted of the following:
| (In thousands) | 2006 | 2005 | 2004 | ||||||
|
Sales: |
|||||||||
|
Sales from company operated restaurants |
$ | 2,058,454 | $ | 2,046,592 | $ | 2,096,734 | |||
|
Product sales to franchisees |
96,153 | 91,773 | 97,297 | ||||||
| $ | 2,154,607 | $ | 2,138,365 | $ | 2,194,031 | ||||
|
Franchise revenues: |
|||||||||
|
Rents and royalties |
281,072 | 291,179 | 298,230 | ||||||
|
Franchise fees |
1,208 | 4,449 | 4,285 | ||||||
|
Net gains on sales of properties to franchisees |
2,390 | 21,425 | 5,612 | ||||||
| 284,670 | 317,053 | 308,127 | |||||||
|
Total revenues |
$ | 2,439,277 | $ | 2,455,418 | $ | 2,502,158 | |||
| NOTE 16 RECENTLY | ISSUED ACCOUNTING STANDARDS |
In September 2006, the Financial Accounting Standards Board (“ FASB ”) issued SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of SFAS Nos. 87, 88, 106, and 132(R)”. This statement requires the recognition of the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its consolidated balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This statement also requires the measurement of the funded status of a plan as of the date of the year-end consolidated balance sheet and disclosure in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. This statement is effective for fiscal years ending after December 15, 2006. As a result of SFAS No. 158, the Company reduced both the prepaid pension asset and the long-term pension liability by $34.0 million.
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 creates consistency and comparability in fair value measurements among the many accounting pronouncements that require fair value measurements but does
77
not require any new fair value measurements. This Statement is effective for fiscal years beginning after November 15, 2006. The adoption of SFAS No. 157 is not expected to have a material impact on the Company’s financial statements.
In September 2006, the SEC issued SAB No. 108 expressing the staff’s views regarding the process of quantifying financial statement misstatements. The staff believes that in making materiality evaluations of correcting a financial statement misstatement, management should quantify the carryover and reversing effects of prior year misstatements on the current year financial statements. The cumulative effect of the initial application, if any, should be reported in the carrying amount of assets and liabilities as of the beginning of the fiscal year and the offsetting adjustment to the opening balance of retained earnings. This SAB is effective for fiscal years ending after November 15, 2006. The adoption of SAB No. 108 did not have a material impact on the Company’s financial statements.
In July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes”, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes”. An uncertain tax position will be recognized if it is determined that it is more likely than not to be sustained upon examination. The tax position is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The cumulative effect of applying the provisions of this Interpretation is to be reported as a separate adjustment to the opening balance of retained earnings in the year of adoption. This statement is effective for fiscal years beginning after December 15, 2006. Upon adoption, management estimates that there will not be a significant adjustment to retained earnings for a change in reserves for uncertain tax positions and is in the process of finalizing its analysis.
| NOTE 17 SUBSEQUENT | EVENT |
On February 20, 2007, the Company announced it had entered into an ASR transaction with a broker-dealer to purchase up to $300 million of its common shares. The common shares purchased will be placed into treasury to be used for general corporate purposes. The number of shares that the Company may repurchase pursuant to the ASR will not be known until conclusion of the transaction, which is expected to occur during the Company’s first quarter; however, the Company expects to repurchase up to approximately 9 million shares. The price per share to be paid by the Company will be determined by reference to the weighted average price per share actually paid by the broker-dealer to purchase shares during a hedge period expected to be approximately one month, subject to a cap and a floor. The ASR agreement includes the option to settle the contract in cash or shares of the Company’s common stock and, accordingly, the contract will be classified in equity.
78
| NOTE 18 QUARTERLY | FINANCIAL DATA (UNAUDITED) |
|
Quarter (In thousands, except per share data) (1) |
First | Second | Third | Fourth | |||||||||||||||||||||||
| 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||||||
|
Revenues (2) |
$ | 578,678 | $ | 603,705 | $ | 634,113 | $ | 631,613 | $ | 630,108 | $ | 617,233 | $ | 596,378 | $ | 602,867 | |||||||||||
|
Gross profit (3) |
48,117 | 83,975 | 94,759 | 93,829 | 89,268 | 92,416 | 83,213 | 92,281 | |||||||||||||||||||
|
Income (loss) from
|
(5,897 | ) | 13,539 | 9,302 | 22,075 | 23,692 | 20,434 | 9,949 | 29,047 | ||||||||||||||||||
|
Income (loss) from
|
57,129 | 37,717 | (38,417 | ) | 48,685 | 45,476 | 51,654 | (6,922 | ) | 916 | |||||||||||||||||
|
Net income (loss) |
51,232 | 51,256 | (29,115 | ) | 70,760 | 69,168 | 72,088 | 3,027 | 29,963 | ||||||||||||||||||
|
Basic earnings (loss) per common share: |
|||||||||||||||||||||||||||
|
Basic earnings (loss) per common share from continuing operations (4) |
$ | (0.05 | ) | $ | 0.12 | $ | 0.08 | $ | 0.19 | $ | 0.20 | $ | 0.18 | $ | 0.09 | $ | 0.25 | ||||||||||
|
Basic earnings (loss) per common share from discontinued operations (5) |
0.50 | 0.33 | (0.33 | ) | 0.43 | 0.39 | 0.44 | (0.06 | ) | 0.01 | |||||||||||||||||
|
Basic earnings (loss) per common share |
$ | 0.45 | $ | 0.45 | $ | (0.25 | ) | $ | 0.62 | $ | 0.59 | $ | 0.62 | $ | 0.03 | $ | 0.26 | ||||||||||
|
Diluted earnings (loss) per common share: |
|||||||||||||||||||||||||||
|
Diluted earnings (loss) per common share from continuing operations (4) (6) |
$ | (0.05 | ) | $ | 0.12 | $ | 0.08 | $ | 0.19 | $ | 0.20 | $ | 0.17 | $ | 0.09 | $ | 0.24 | ||||||||||
|
Diluted earnings (loss) per common share from discontinued operations (5) |
0.50 | 0.33 | (0.33 | ) | 0.42 | 0.38 | 0.44 | (0.06 | ) | 0.01 | |||||||||||||||||
|
Diluted earnings (loss)
|
$ | 0.45 | $ | 0.45 | $ | (0.25 | ) | $ | 0.61 | $ | 0.58 | $ | 0.61 | $ | 0.03 | $ | 0.25 | ||||||||||
| (1) | Results of operations of THI, Baja Fresh and Cafe Express are reflected as discontinued operations for all periods presented (See Notes 1 and 10). |
| (2) | During 2006, the Company revised its presentation of the sale of kids’ meal toys to reflect the sales on a gross versus net basis under the provisions of Emerging Issues Task Force (“ EITF ”) 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent”. The revised presentation had no impact on operating income or net income. Amounts related to the prior years were not material, but were revised for purposes of comparability. The revisions increased sales and cost of sales $14.2 million, $15.5 million, $14.7 million and $15.0 million, in the first, second, third and fourth quarters of 2006, respectively. The revisions increased sales and cost of sales $14.8 million, $16.5 million, $16.4 million and $13.9 million in the first, second, third and fourth quarters of 2005, respectively. |
| (3) | Total revenues less cost of sales, company operated restaurant operating costs, operating costs and depreciation of property and equipment. |
| (4) | The fourth quarter of 2006 includes pretax store closing costs of $16.7 million ($10.4 million after tax) and pretax restructuring charges of $7.9 million ($4.9 million after tax). The fourth quarter of 2005 includes pretax store closing costs of $22.5 million ($13.9 million after tax). |
| (5) | The fourth quarter of 2006 includes pretax fixed asset and intangible assets impairment charges of $4.0 million ($2.4 million after tax) related to Cafe Express. The fourth quarter of 2005 includes pretax goodwill impairment charges of $36.1 million ($22.4 million after tax) related to THI and Cafe Express and pretax store closing costs of $27.3 million ($16.9 million after tax) related to THI, Baja Fresh and Cafe Express. |
| (6) | Due to the loss from continuing operations in the first quarter of 2006, basic shares are used for earnings per share calculations. |
79
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| Item 9A. | Controls and Procedures |
(a) The Company, under the supervision, and with the participation, of its management, including its Chief Executive Officer and General Controller, 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 General Controller concluded, as of the end of the period covered by this report, that such disclosure controls and procedures were effective.
(b) In Item 8 above, management provided a report on internal control over financial reporting, in which management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2006. In addition, PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm, provided an attestation report on management’s assessment of internal control over financial reporting. The full text of management’s report and PricewaterhouseCooper’s attestation report appear at pages 38 through 40 herein.
(c) No change was made in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
| Item 9B. | Other Information |
None.
80
Items 10, 11, 12, and 13. Directors and Executive Officers and Corporate Governance; Executive Compensation; Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters; and Certain Relationships and Related Transactions, and Director Independence
The information required by these Items, other than the
information set forth below, is incorporated herein by reference from the Company’s 2007 Proxy Statement, which will be filed no later than 120 days after December 31, 2006. However, no information set forth in the 2007 Proxy Statement
EXECUTIVE OFFICERS OF THE REGISTRANT
|
Name |
Age |
Position with Company |
Officer Since | |||
|
Kerrii B. Anderson |
49 | Chief Executive Officer and President | 2000 | |||
|
David J. Near |
37 | Chief Operations Officer | 2006 | |||
|
Jonathan F. Catherwood |
45 | Executive Vice President and Treasurer | 2001 | |||
|
Jeffrey M. Cava |
55 | Executive Vice President | 2003 | |||
|
Leon M. McCorkle, Jr. |
66 | Executive Vice President, General Counsel and Secretary | 1998 | |||
|
Ian B. Rowden |
47 | Executive Vice President and Chief Marketing Officer | 2004 | |||
|
Brendan P. Foley, Jr. |
47 | Senior Vice President, General Controller and Assistant Secretary | 2004 |
No arrangements or understandings exist pursuant to which any person has been, or is to be, selected as an officer, except in the event of a change in control of the Company, as provided in the Company’s Key Executive Agreements. The executive officers of the Company are appointed by the Board of Directors.
Mrs. Anderson joined the Company in 2000 as Executive Vice President and Chief Financial Officer. Prior to joining the Company, Mrs. Anderson had held the titles of Senior Vice President and Chief Financial Officer of M/I Schottenstein Homes, Inc. since 1987. She was also Secretary of M/I Schottenstein Homes, Inc. from 1987 to 1994 and Assistant Secretary from 1994 until she joined the Company. She was named interim Chief Executive Officer and President on April 17, 2006 and Chief Executive Officer and President on November 9, 2006.
Mr. Near joined the Company in 2006 as Chief Operations Officer. He has been a co-owner of Pisces Foods, L.P. since 1995. Pisces Foods is a franchisee of 29 Wendy’s restaurants in Austin, Texas. Upon joining the Company, Mr. Near relinquished the management functions of Pisces Foods to his brother, but remained a co-owner of the franchised company. He also served as president of Wendy’s Franchise Advisory Council for two years prior to assuming his current position.
Mr. Catherwood joined the Company in 2001 as Senior Vice President, Mergers and Acquisitions. In 2002, Mr. Catherwood was named Executive Vice President, Mergers, Acquisitions and Business Integration. Mr. Catherwood was named Treasurer of the Company in July 2004. Prior to joining the Company, he was a partner at the Windsor Group, LLC from 1998 until 2001.
Mr. Cava joined the Company in 2003 as Executive Vice President, Human Resources. Prior to joining the Company, Mr. Cava was a human resources consultant with JMC Consulting LLC from 2001 until 2003. From 1996 to 2001, Mr. Cava was Vice President and Chief Human Resources Officer for NIKE, Inc.
Mr. McCorkle joined the Company in 1998 as Senior Vice President and General Counsel. He was also named Secretary of the Company in 2000. In 2001, Mr. McCorkle was named Executive Vice President. Prior to joining the Company, he was a senior partner of Vorys, Sater, Seymour and Pease LLP.
Mr. Rowden joined the Company in 2004 as Executive Vice President and Chief Marketing Officer. Prior to joining the Company, Mr. Rowden held the titles of Executive Vice President and Chief Marketing Officer at Callaway Golf from 2000 until 2004. He also served as Vice President and Director of Worldwide Advertising at The Coca-Cola Company from 1995 until 2000.
81
Mr. Foley joined the Company in 2003 as a director of corporate accounting, and was promoted a year later to Vice President of Technical Compliance and Consolidations. He was named to his current position in 2006. Prior to joining the Company, Mr. Foley was with Borden Foods for 12 years, last serving as Vice President and Assistant General Controller.
Other
The Board of Directors has adopted and approved Principles of Governance, Governance Guidelines, the Standards of Business Practices , a Code of Business Conduct (applicable to directors) and written charters for its Nominating and Corporate Governance, Audit and Compensation Committees. In addition, the Audit Committee has adopted a written Audit Committee Pre-Approval Policy with respect to audit and non-audit services to be performed by the Company’s independent registered public accounting firm. All of the foregoing documents are available on the Company’s investor website at www.wendys-invest.com and a copy of the foregoing will be made available (without charge) to any shareholder upon request.
| Item 14. | Principal Accounting Fees and Services |
The information required by this Item is incorporated herein by reference to the information under the headings “Audit Committee” and “Audit and Other Service Fees” in the Company’s 2007 Proxy Statement, which will be filed no later than 120 days after December 31, 2006.
82
| Item 15. | Exhibits, Financial Statement Schedules |
| (a) | (1) and (2)—The following Consolidated Financial Statements of Wendy’s International, Inc. and Subsidiaries, included in Item 8 herein. |
Management’s Report on Internal Control Over Financial Reporting.
Report of Independent Registered Public Accounting Firm.
Consolidated Statements of Income—Years ended December 31, 2006, January 1, 2006 and January 2, 2005.
Consolidated Balance Sheets—December 31, 2006 and January 1, 2006.
Consolidated Statements of Cash Flows—Years ended December 31, 2006, January 1, 2006 and January 2, 2005.
Consolidated Statements of Shareholders’ Equity—Years ended December 31, 2006, January 1, 2006 and January 2, 2005.
Consolidated Statements of Comprehensive Income—Years ended December 31, 2006, January 1, 2006 and January 2, 2005.
Notes to the Consolidated Financial Statements.
| (3) | Listing of Exhibits—See Index to Exhibits. |
The following management contracts or compensatory plans or arrangements are required to be filed as exhibits to this report:
Deferred Compensation Plan.
First Amendment to Deferred Compensation Plan.
Second Amendment to Deferred Compensation Plan.
Third Amendment to Deferred Compensation Plan.
Fourth Amendment to Deferred Compensation Plan.
Senior Executive Annual Performance Plan.
Executive Annual Performance Plan, as amended.
Supplemental Executive Retirement Plan.
First Amendment to Supplemental Executive Retirement Plan.
Supplemental Executive Retirement Plan No. 2.
1990 Stock Option Plan, as amended.
WeShare Stock Option Plan, as amended.
2003 Stock Incentive Plan, as amended and restated.
Sample Restricted Stock Award Agreement.
Sample Formula Restricted Stock Award Agreement.
Sample Formula Restricted Stock Unit Award Agreement.
Sample Stock Unit Award Agreement (ratable vesting).
83
Sample Stock Unit Award Agreement (cliff vesting).
Sample 2006 Performance Share Award Agreement.
Sample Indemnification Agreement between the Company and each of Messrs. Keller, Kirwan, Lauer, Levin, Lewis, Millar, Oran, Pickett, Rothschild, Thompson and Mses. Anderson, Crane and Hill.
Sample Indemnification Agreement for officers and employees of the Company and its subsidiaries.
Sample Restated Key Executive Agreement between the Company and Messrs. Catherwood, Cava, Foley, McCorkle, Near, Rowden and Mrs. Anderson.
Agreement with David Near.
Form of Retention letter entered into with Messrs. Catherwood and Cava.
Interim CEO Retention Agreement with Kerrii B. Anderson (now superseded).
Employment Agreement with Kerrii B. Anderson.
| (b) | Exhibits filed with this report are listed in the Index to Exhibits beginning on page 87. |
| (c) | The following Consolidated Financial Statement Schedule of Wendy’s International, Inc. and Subsidiaries is included in Item 15(c): II—Valuation and Qualifying Accounts. |
| All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the information has been disclosed elsewhere. |
84
Pursuant to the requirements of Section 13 or 15(d) 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.
|
||||
|
By: |
/ S / KERRII B. ANDERSON | 3/1/07 | ||
|
Kerrii B. Anderson Chief Executive Officer and President |
||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| / S / KERRII B. ANDERSON | 3/1/07 | / S / BRENDAN P. FOLEY JR. | 3/1/07 | |||||
|
Kerrii B. Anderson, Chief Executive Officer and President, Director |
Brendan P. Foley, Jr., Senior Vice President, General Controller and Assistant Secretary | |||||||
| / S / ANN B. CRANE* | 3/1/07 | / S / JANET HILL* | 3/1/07 | |||||
|
Ann B. Crane, Director |
Janet Hill, Director | |||||||
| / S / THOMAS F. KELLER* | 3/1/07 | / S / WILLIAM E. KIRWAN* | 3/1/07 | |||||
|
Thomas F. Keller, Director |
William E. Kirwan, Director | |||||||
| / S / DAVID P. LAUER* | 3/1/07 | / S / JERRY W. LEVIN* | 3/1/07 | |||||
|
David P. Lauer, Director |
Jerry W. Levin, Director | |||||||
| / S / J. RANDOLPH LEWIS* | 3/1/07 | / S / JAMES F. MILLAR* | 3/1/07 | |||||
|
J. Randolph Lewis, Director |
James F. Millar, Director | |||||||
| / S / STUART I. ORAN* | 3/1/07 | / S / JAMES V. PICKETT* | 3/1/07 | |||||
|
Stuart I. Oran, Director |
James V. Pickett, Chairman of the Board | |||||||
| / S / PETER H. ROTHSCHILD* | 3/1/07 | / S / JOHN R. THOMPSON* | 3/1/07 | |||||
|
Peter H. Rothschild, Director |
John R. Thompson, Director | |||||||
|
*By: |
/ S / KERRII B. ANDERSON | 3/1/07 | ||
|
Kerrii B. Anderson, Attorney-in-Fact |
85
WENDY’S INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS (in thousands)*
|
Classification |
Balance at
of Year |
Charged
Expenses |
Additions (Deductions) (a) |
Balance at End of Year |
|||||||||
|
Fiscal year ended December 31, 2006: |
|||||||||||||
|
Reserve for royalty receivables |
$ | 3,143 | $ | 364 | $ | (371 | ) | $ | 3,136 | ||||
|
Deferred tax asset valuation allowance |
0 | 81,000 | 0 | 81,000 | |||||||||
|
Reserve for franchise receivables |
5,797 | 1,897 | (911 | ) | 6,783 | ||||||||
| $ | 8,940 | $ | 83,261 | $ | (1,282 | ) | $ | 90,919 | |||||
|
Fiscal year ended January 1, 2006: |
|||||||||||||
|
Reserve for royalty receivables |
$ | 2,880 | $ | 370 | $ | (107 | ) | $ | 3,143 | ||||
|
Deferred tax asset valuation allowance |
0 | 0 | 0 | 0 | |||||||||
|
Reserve for franchise receivables |
3,882 | 2,440 | (525 | ) | 5,797 | ||||||||
| $ | 6,762 | $ | 2,810 | $ | (632 | ) | $ | 8,940 | |||||
|
Fiscal year ended January 2, 2005: |
|||||||||||||
|
Reserve for royalty receivables |
$ | 2,814 | $ | 272 | $ | (206 | ) | $ | 2,880 | ||||
|
Deferred tax asset valuation allowance |
0 | 0 | 0 | 0 | |||||||||
|
Reserve for franchise receivables |
2,132 | 2,177 | (427 | ) | 3,882 | ||||||||
| $ | 4,946 | $ | 2,449 | $ | (633 | ) | $ | 6,762 | |||||
| * | Amounts represent continuing operations only. |
| (a) | Primarily represents reserves written off or reversed due to the resolution of certain franchise situations. |
Year-end balances are reflected in the Consolidated Balance Sheet as follows:
|
December 31, 2006 |
January 1, 2006 |
January 2, 2005 |
|||||||
|
Deducted from accounts receivable |
$ | 4,756 | $ | 4,978 | $ | 5,171 | |||
|
Deducted from notes receivable—current |
1,673 | 836 | 331 | ||||||
|
Deducted from notes receivable—long-term |
3,490 | 3,126 | 1,260 | ||||||
|
Component of deferred tax liability—long-term |
81,000 | 0 | 0 | ||||||
| $ | 90,919 | $ | 8,940 | $ | 6,762 | ||||
86
WENDY’S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
|
Exhibit |
Description |
Where found |
||
|
3(a) |
Articles of Incorporation, as amended to date | Incorporated herein by reference from Exhibit 3(a) of Form 10-K for the year ended January 3, 1999. | ||
|
(b) |
New Regulations, as amended | Incorporated herein by reference from Exhibit 3 of Form 10-Q for the quarter ended March 31, 2002. | ||
|
*4(a) |
Indenture between the Company and Bank One, National Association, pertaining to 6.25% Senior Notes due November 15, 2011 and 6.20% Senior Notes due June 15, 2014 | Incorporated herein by reference from Exhibit 4(i) of Form 10-K for the year ended December 30, 2001. | ||
|
(b) |
Amended and Restated Rights Agreement between the Company and American Stock Transfer and Trust Company | Incorporated herein by reference from Exhibit 1 of Amendment No. 2 to Form 8-A/A Registration Statement, File No. 1-8116, filed on December 8, 1997. | ||
|
(c) |
Amendment No. 1 to the Amended and Restated Rights Agreement between the Company and American Stock Transfer and Trust Company | Incorporated herein by reference from Exhibit 2 of Amendment No. 3 to Form 8-A/A Registration Statement, File No. 1-8116, filed on January 26, 2001. | ||
|
(d) |
Wendy’s International, Inc. Deferred Compensation Plan | Incorporated herein by reference from Exhibit 4(d) of Form S-8, File No. 333-109952, filed on October 24, 2003. | ||
|
(e) |
First Amendment to Wendy’s International, Inc. Deferred Compensation Plan | Incorporated herein by reference from Exhibit 4(e) of Form 10-K for the year ended December 28, 2003. | ||
|
(f) |
Second Amendment to Wendy’s International, Inc. Deferred Compensation Plan | Incorporated herein by reference from Exhibit 4 of Form 10-Q for the quarter ended September 26, 2004. | ||
|
(g) |
Third Amendment to Wendy’s International, Inc. Deferred Compensation Plan | Incorporated herein by reference from Exhibit 4 of Form 8-K filed March 10, 2005. | ||
|
(h) |
Fourth Amendment to Wendy’s International, Inc. Deferred Compensation Plan | Incorporated herein by reference from Exhibit 4 of Form 8-K filed December 20, 2005. | ||
|
(i) |
Notice Requirement Relating to the 2007 Annual Meeting of Shareholders | Attached hereto. | ||
|
10(a) |
Sample Restated Key Executive Agreement between the Company and Messrs. Catherwood, Cava, Foley, McCorkle, Near, Rowden, and Mrs. Anderson | Incorporated herein by reference from Exhibit 10(a) of Form 10-K for the year ended January 3, 1999. | ||
| * | Neither the Company nor its subsidiaries are party to any other instrument with respect to long-term debt for which securities authorized thereunder exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. Copies of instruments with respect to long-term debt of lesser amounts will be furnished to the Commission upon request. |
87
|
(b) |
Assignment of Rights Agreement between the Company and Mr. Thomas | Incorporated herein by reference from Exhibit 10(c) of Form 10-K for the year ended December 31, 2000. | ||
|
(c) |
Senior Executive Annual Performance Plan | Incorporated herein by reference from Annex B to the Company’s Definitive 2002 Proxy Statement, dated March 5, 2002. | ||
|
(d) |
Executive Annual Performance Plan, as amended | Attached hereto. | ||
|
(e) |
Supplemental Executive Retirement Plan | Incorporated herein by reference from Exhibit 10(f) of Form 10-K for the year ended December 29, 2002. | ||
|
(f) |
First Amendment to Supplemental Executive Retirement Plan | Attached hereto. | ||
|
(g) |
Supplemental Executive Retirement Plan No. 2 | Attached hereto. | ||
|
(h) |
1990 Stock Option Plan, as amended | Incorporated herein by reference from Exhibit 10(c) of Form 10-Q for the quarter ended October 1, 2006. | ||
|
(i) |
WeShare Stock Option Plan, as amended | Incorporated herein by reference from Exhibit 10(l) of Form 10-K for the year ended December 28, 2003. | ||
|
(j) |
Sample Indemnification Agreement between the Company and each of Messrs. Keller, Kirwan, Lauer, Levin, Lewis, Millar, Oran, Pickett, Rothschild, Thompson and Mses. Anderson, Crane and Hill | Incorporated herein by reference from Exhibit 10 of Form 10-Q for the quarter ended June 29, 2003. | ||
|
(k) |
2003 Stock Incentive Plan, as amended and restated | Incorporated herein by reference from Exhibit 10(f) of Form 10-Q for the quarter ended April 2, 2006. | ||
|
(l) |
Sample Restricted Stock Award Agreement | Incorporated herein by reference from Exhibit 10(p) of Form 10-K for the year ended January 2, 2005. | ||
|
(m) |
Sample Formula Restricted Stock Award Agreement | Incorporated herein by reference from Exhibit 10(b) of Form 10-Q for the quarter ended April 2, 2006. | ||
|
(n) |
Sample Formula Restricted Stock Unit Award Agreement | Incorporated herein by reference from Exhibit 10(c) of Form 10-Q for the quarter ended April 2, 2006. | ||
|
(o) |
Sample Stock Unit Award Agreement (ratable vesting) | Incorporated herein by reference from Exhibit 10(d) of Form 10-Q for the quarter ended April 2, 2006. | ||
|
(p) |
Sample 2006 Performance Share Award Agreement | Incorporated herein by reference from Exhibit 10(e) of Form 10-Q for the quarter ended April 2, 2006. | ||
|
(q) |
Sample Stock Unit Award Agreement (cliff vesting) | Attached hereto. | ||
|
(r) |
Sample Indemnification Agreement for officers and employees of the Company and its subsidiaries | Incorporated herein by reference from Exhibit 10 of Form 8-K filed July 12, 2005. | ||
88
|
(s) |
Agreement Among the Company, Trian Fund Management, L.P. and Certain Affiliates and Sandell Asset Management Corp. and Certain Affiliates dated March 2, 2006 | Incorporated herein by reference from Exhibit 10(v) of Form 10-K for the year ended January 1, 2006. | ||
|
(t) |
Retirement Agreement of John T. Schuessler | Incorporated herein by reference from Exhibit 10(a) of Form 10-Q for the quarter ended April 2, 2006. | ||
|
(u) |
Interim CEO Retention Agreement with Kerrii B. Anderson (now superseded by Exhibit 10(z) ) | Incorporated herein by reference from Exhibit 10(a) of Form 10-Q for the quarter ended October 1, 2006. | ||
|
(v) |
Agreement with David Near | Incorporated herein by reference from Exhibit 10(d) of Form 10-Q for the quarter ended October 1, 2006. | ||
|
(w) |
Settlement Agreement and Release with John M. Deane | Incorporated herein by reference from Exhibit 10 of Form 8-K filed June 6, 2006. | ||
|
(x) |
Form of Retention Letter entered into with Messrs. Catherwood and Cava | Incorporated herein by reference from Exhibit 10 of Form 8-K filed June 12, 2006. | ||
|
(y) |
Stock Purchase Agreement related to Baja Fresh Mexican Grill | Attached hereto. | ||
|
(z) |
Employment Agreement with Kerrii B. Anderson | Attached hereto. | ||
|
21 |
Subsidiaries of the Registrant | Attached hereto. | ||
|
23 |
Consent of PricewaterhouseCoopers LLP | Attached hereto. | ||
|
24 |
Powers of Attorney | Attached hereto. | ||
|
31(a) |
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | Attached hereto. | ||
|
31(b) |
Rule 13a-14(a)/15d-14(a) Certification of General Controller | Attached hereto. | ||
|
32(a) |
Section 1350 Certification of Chief Executive Officer | Attached hereto. | ||
|
32(b) |
Section 1350 Certification of General Controller | Attached hereto. | ||
|
99 |
Safe Harbor under the Private Securities Litigation Reform Act 1995 | Attached hereto. | ||
89
Exhibit 4(i)
Notice Requirement Relating to the 2007 Annual Meeting of Shareholders
The Board of Directors has adopted the following requirement which is applicable to the 2007 Annual Meeting of Shareholders of the Company. Any shareholder that intends to propose a nomination of a director candidate or otherwise submit any proposal relating to the composition of the Board of Directors for consideration at the Annual Meeting of Shareholders must notify the Corporate Secretary of such nomination or proposal in writing by no later than the close of business on March 15, 2007 in order to be considered timely and appropriate for consideration by the shareholders at the Annual Meeting. The notice should contain all information concerning any such nominee that would be required to be included in a proxy statement relating to any solicitation of proxies with respect to such nominee by the shareholder and the text of any such proposal; the name and address, as they appear in the Company’s books, of the shareholder; the number of common shares of the Company that are beneficially owned by the shareholder; and any material interest of the shareholder in such business. Written notice must be sent to: Corporate Secretary, P.O. Box 256, Dublin, Ohio 43017-0256. No matter will be submitted to vote at the Annual Meeting if written notice has not been given to the Corporate Secretary by such date. No other business other than that set forth in the formal notice of the meeting shall be considered timely for consideration at the 2007 Annual Meeting.
Exhibit 10(d)
WENDY’S INTERNATIONAL, INC.
EXECUTIVE ANNUAL PERFORMANCE PLAN
1. Purpose . The purpose of the Executive Annual Performance Plan (the “Plan”) is to enhance the ability of Wendy’s International, Inc. (the “Company”) and its subsidiaries to attract, motivate, reward, and retain key employees, to strengthen their commitment to the success of the Company and to align their interests with those of the Company’s shareholders by providing additional compensation to designated key employees of the Company based on the achievement of performance objectives. To this end, the Plan provides a means of rewarding participants based on the performance of the Company, its Operating Units, and/or the individual.
2. Administration . The Plan shall be administered by the Committee and the Company’s CEO as provided herein. The Committee shall have full authority to establish the rules and regulations relating to the Plan, to interpret the Plan and those rules and regulations, to determine the Performance Objectives of the Company and/or Operating Units, to establish the bonus pool available, to decide the facts in any case arising under the Plan and to make all other determinations and to take all other actions necessary or appropriate for the proper administration of the Plan, including the delegation of such authority or power, where appropriate. The Committee’s administration of the Plan, including all such rules and regulations, interpretations, selections, determinations, approvals, decisions, delegations, amendments, terminations and other actions, shall be final and binding on the Company, its stockholders and the Participants and their beneficiaries. The CEO shall have the full authority to determine the Participants in the Plan, the Award opportunities for such Participants, and whether such Award opportunities shall be based on the Performance Objectives of the Company, the Performance Objectives of one or more Operating Units, the Performance Objectives of the individual or based on a combination of these Performance Objectives, provided that no more than 20% of the total target Award opportunity for a Participant (when combined with awards granted under any other bonus plan of the Company payable for the same fiscal year) may be based on individual Performance Objectives.
3. Eligible Employees . Generally, all Employees are eligible to participate in the Plan for any fiscal year. However, participation shall be limited to those Employees selected by the CEO to participate in the Plan for each fiscal year in accordance with Section 4 or Section 6.
4. Determination of Awards . For each fiscal year, the Committee shall establish the Performance Objectives of the Company and/or Operating Units and the total bonus pool available for individual Performance Objectives. The total bonus pool available for individual Performance Objectives for a fiscal year shall be increased by the target bonus attributable to individual Performance Objectives for any Participant who is provided an Award by the CEO after such pool has been established. The CEO shall determine (i) the Employees who shall be Participants during each fiscal year, (ii) whether Awards for each Participant shall be based upon the achievement of Performance Objectives of the Company, the Performance Objective of one or more Operating Units, the Performance Objectives of the individual or on a combination of the achievement of these Performance Objectives, and (iii) the Award opportunities for each
Participant, including the extent to which Awards will be payable for actual performance between each level of the Performance Objectives. The CEO shall provide to the Committee a schedule that indicates the Participants selected, their Award opportunities, and whether such Awards will be based on the Performance Objectives of the Company, the Performance Objective of one or more Operating Units, the Performance Objectives of the individual or a combination of these Performance Objectives. In no event may the aggregate target Awards based on individual Performance Objectives or the aggregate bonuses actually payable based on such individual Performance Objectives exceed the total bonus pool available for a fiscal year. The Company shall notify each Participant of the applicable Performance Objectives for such Participant and his or her corresponding Award opportunities for each fiscal year.
5. Payment of Awards . Awards under this Plan shall be payable as follows:
(i) As soon as practicable after the determination of the Company’s and, if applicable, the Operating Units’ financial performance for a fiscal year and, if applicable, the CEO’s determination of the allocation of the available bonus pool among Participants based on their attainment of individual Performance Objectives, subject to the limitation that the aggregate bonuses payable based on individual Performance Objectives may not exceed the total bonus pool available for the fiscal year, each Award made under Section 4, to the extent earned, shall be paid in a single lump sum cash payment, less applicable withholding taxes. The CEO’s determination may include a reduction of the Participant’s available Award opportunity originally established, to the extent necessary to remain within the total bonus pool available.
(ii) Each Award made under Section 6 shall be paid in a single lump sum cash payment, less applicable withholding taxes, as specified in the discretionary award.
Payments under this Plan are intended to qualify as short-term deferrals under Section 409A of the Code and shall be made no later than the March 15 th immediately following the close of the fiscal year in which such Award was made; provided , however , that any payment that is delayed after the applicable March 15 th due to an unforeseeable event, as that term may be defined in regulations issued under Code section 409A, shall be paid as soon as practicable. Notwithstanding the foregoing, a Participant may elect to defer all or a portion of any Award otherwise payable in accordance with this Section, if permitted pursuant to a deferred compensation plan adopted by, or an agreement entered into with, the Company or any of its subsidiaries.
6. Discretionary Bonuses . In addition to any Awards payable under Section 4, the CEO, after consultation with the Committee, shall have the authority to make additional cash incentive awards to any Employees selected by the CEO in amounts determined by the CEO.
7. Termination of Employment . No Award for a fiscal year shall be payable to any Participant unless he or she is employed by the Company or one of its subsidiaries on the payment date for Awards payable in respect of the fiscal year, unless the Participant’s employment was terminated because of his or her (i) death, (ii) disability or (iii) retirement after attaining age 60 and the completion of 10 years of continuous service with the Company, in which event the Participant will be entitled to a pro-rata portion (which shall be calculated based
- 2 -
on the ratio of the number of calendar days worked in the fiscal year to the total number of calendar days in the fiscal year) of the Award otherwise payable in respect of that fiscal year, subject to the Committee’s discretion as set forth in Section 2 hereof.
8. Change in Control . Notwithstanding any provision in the Plan to the contrary, upon the occurrence of a Change in Control of the Company, the following provisions shall apply:
(i) The minimum Award payable to each Participant in respect of the fiscal year in which the Change in Control occurs shall be the greatest of:
(A) the Award or other annual bonus paid or payable to the Participant in respect of the fiscal year prior to the year in which the Change in Control occurs;
(B) the Award amount that would be payable to the Participant assuming that the Company achieved the target level of the Performance Objectives for such fiscal year; and
(C) the Award amount that would be payable to the Participant based on the Company’s actual performance and achievement of applicable Performance Objectives for such fiscal year through the date of the Change in Control.
(ii) Notwithstanding anything to the contrary contained herein, in the event that following the date of a Change in Control and prior to the payment date for Awards payable in respect of the fiscal year in which the Change in Control occurs a Participant’s employment is terminated by the Company and its subsidiaries without Cause or by the Participant for Good Reason, such Participant shall be entitled to receive the Award otherwise payable pursuant to the terms of the Plan in respect of that fiscal year as if he or she had remained in the employ of the Company through the payment date for Awards payable in respect of such fiscal year.
(iii) If a Participant’s employment is terminated by the Company and its subsidiaries without Cause prior to the date of a Change in Control but the Participant reasonably demonstrates that the termination (A) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control or (B) otherwise arose in connection with, or in anticipation of, a Change in Control which has been threatened or proposed, such termination shall be deemed to have occurred after a Change in Control for purposes of this Agreement provided a Change in Control shall actually have occurred.
9. Adjustments . The Committee may, at the time Performance Objectives are determined for a fiscal year, or at any time prior to the final determination of Awards in respect of such fiscal year, provide for the manner in which performance will be measured against the Performance Objectives or may adjust the Performance Objectives to reflect the impact of specified corporate transactions (such as a stock split or stock dividend), special charges, accounting or tax law changes and other extraordinary or nonrecurring events.
10. Designation of Beneficiary . In the event of a Participant’s death prior to full payment of any Award hereunder, unless such Participant shall have designated a beneficiary or
- 3 -
beneficiaries in accordance with this Section 10, payment of any Award due under the Plan shall be made to the Participant’s estate. A beneficiary designation under this Plan, or revocation of a prior beneficiary designation, will be effective only if it is made in writing on a form provided by the Company, signed by the Participant and received by the Benefits Department of the Company. If a beneficiary has been designated under this Plan and such beneficiary dies prior to receiving any payment of an Award or if such designation shall for any reason be illegal or ineffective, Awards payable under the Plan shall be paid to the Participant’s estate.
11. Amendment or Termination . The Board may amend or terminate the Plan at any time in its discretion; provided , however , that no amendment or termination of the Plan may affect any Award made under the Plan prior to that time; and provided further , however , that the Plan may not be amended or terminated through and including the fiscal year in which a Change in Control occurs (i) at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control or (ii) otherwise in connection with, or in anticipation of, a Change in Control which has been threatened or proposed, in either case provided a Change in Control shall actually have occurred.
12. Miscellaneous Provisions
(a) Neither the establishment of this Plan, nor any action taken hereunder, shall be construed as giving any Employee or any Participant any right to be retained in the employ of the Company or any of its subsidiaries.
(b) A Participant’s rights and interests under the Plan may not be assigned or transferred, except as provided in Section 10, and any attempted assignment or transfer shall be null and void and shall extinguish, in the Company’s sole discretion, the Company’s obligation under the Plan to pay Awards with respect to the Participant.
(c) The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund, or to make any other segregation of assets, to assure payment of Awards.
(d) The Company shall have the right to deduct from Awards paid any taxes or other amounts required by law to be withheld.
(e) Nothing contained in the Plan shall limit or affect in any manner or degree the normal and usual powers of management, exercised by the officers and the Board or committees thereof, to change the duties or the character of employment of any employee of the Company or any of its subsidiaries or to remove the individual from the employment of the Company or any of its subsidiaries at any time, all of which rights and powers are expressly reserved.
13. Definitions .
(a) “ Award ” shall mean the cash incentive award earned by a Participant under the Plan for any fiscal year.
- 4 -
(b) “ Base Salary ” shall mean the Participant’s annual base salary actually paid by the Company and/or any of its subsidiaries and received by the Participant during the applicable fiscal year. Annual base salary does not include (i) Awards under the Plan, (ii) long-term incentive awards, (iii) signing bonuses or any similar bonuses, (iv) imputed income from such programs as executive life insurance, or (v) nonrecurring earnings such as moving expenses, and is based on salary earnings before reductions for such items as contributions under Sections 125 or 401(k) of the Code or pursuant to any nonqualified deferred compensation plan or agreement.
(c) “ Board ” shall mean the Board of Directors of the Company.
(d) “ Cause ” shall mean the termination of a Participant’s employment by reason of the Board’s good faith determination that the Participant (a) willfully and continually failed to substantially perform his or her duties with the Company (other than a failure resulting from the Participant’s incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Participant by the Board which specifically identifies the manner in which the Board believes that the Participant has not substantially performed his or her duties and such failure substantially to perform continues for at least fourteen (14) days, or (b) has willfully engaged in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise, or (c) has otherwise materially breached the terms of his or her employment agreement with the Company, if applicable (each, an “Employment Agreement”) (including, without limitation, a voluntary termination of the Participant’s employment by the Participant during the term of such Employment Agreement). No act, nor failure to act, on the Participant’s part, shall be considered “willful” unless he or she has acted, or failed to act, with an absence of good faith and without a reasonable belief that his or her action or failure to act was in the best interest of the Company. Notwithstanding the foregoing, the Participant’s employment shall not be deemed to have been terminated for Cause unless and until (1) there shall have been delivered to the Participant a copy of a written notice setting forth that the Participant was guilty of conduct set forth above in clause (a), (b) or (c) of the first sentence of this definition and specifying the particulars thereof in detail, and (2) the Participant shall have been provided an opportunity to be heard by the Board (with the assistance of Participant’s counsel).
(e) “ CEO ” shall mean the Chief Executive Officer of the Company.
(f) “ Change in Control ” shall mean the occurrence during the term of the Plan of:
(i) An acquisition (other than directly from the Company) of any common stock or other voting securities of the Company entitled to vote generally for the election of directors (the “Voting Securities”) by any “Person” (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), immediately after which such Person has “Beneficial Ownership” (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of thirty percent (30%) or more of the then outstanding shares of the Company’s common stock or the combined voting power of the Company’s then outstanding Voting Securities; provided , however , in determining whether a
- 5 -
Change in Control has occurred, Voting Securities which are acquired in a “Non-Control Acquisition” (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A “Non-Control Acquisition” shall mean an acquisition by (A) an employee benefit plan (or a trust forming a part thereof) maintained by (1) the Company or (2) any corporation or other Person of which a majority of its voting power or its voting equity securities or equity interest is owned, directly or indirectly, by the Company (for purposes of this definition, a “Subsidiary”) (B) the Company or its Subsidiaries, or (C) any Person in connection with a “Non-Control Transaction” (as hereinafter defined);
(ii) The individuals who, as of the date the Board adopted the Plan, are members of the Board (the “Incumbent Board”), cease for any reason to constitute at least seventy percent (70%) of the members of the Board; provided , however , that if the election, or nomination for election by the Company’s common stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Plan, be considered as a member of the Incumbent Board; provided further , however , that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a “Proxy Contest”) including by reason of any agreement intended to avoid or settle any Proxy Contest; or
(iii) The consummation of:
(A) A merger, consolidation or reorganization with or into the Company or a Subsidiary, or in which securities of the Company are issued (a “Merger”), unless such Merger is a “Non-Control Transaction.” A “Non-Control Transaction” shall mean a Merger if:
(1) the stockholders of the Company immediately before such Merger own directly or indirectly immediately following such Merger at least seventy percent (70%) of the combined voting power of the outstanding voting securities of the corporation resulting from such Merger (the “Surviving Corporation”) in substantially the same proportion as their ownership of the Voting Securities immediately before such Merger,
(2) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such Merger constitute at least two-thirds of the members of the board of directors of the Surviving Corporation, or a corporation beneficially directly or indirectly owning a majority of the Voting Securities of the Surviving Corporation, and
(3) no Person other than (i) the Company, (ii) any Subsidiary, (iii) any employee benefit plan (or any trust forming a part thereof) that immediately prior to such Merger was maintained by the Company or any Subsidiary, or (iv) any Person who, immediately prior to such Merger had Beneficial Ownership of thirty percent (30%) or more of the then outstanding Voting Securities or common stock of the Company, has Beneficial Ownership of thirty percent (30%) or more of the combined voting power of the Surviving Corporation’s then outstanding voting securities or its common stock.
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(B) A complete liquidation or dissolution of the Company; or
(C) The sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the “Subject Person”) acquired Beneficial Ownership of more than the permitted amount of the then outstanding common stock or Voting Securities as a result of the acquisition of common stock or Voting Securities by the Company which, by reducing the number of shares of common stock or Voting Securities then outstanding, increases the proportional number of shares Beneficially Owned by the Subject Persons, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of common stock or Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional common stock or Voting Securities which increase the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur.
(g) “ Code ” shall mean the Internal Revenue Code of 1986, as amended.
(h) “ Committee ” shall mean the Compensation Committee of the Board or such other committee appointed by the Board from time to time to administer the Plan and to perform the functions set forth herein.
(i) “ Employee ” shall mean any employee of the Company or any of its subsidiaries.
(j) “ Good Reason ” shall mean the occurrence after a Change in Control of any of the following events or conditions without the Participant’s express written consent:
(i) a change in the Participant’s status, title, position or responsibilities (including reporting responsibilities) which, in the Participant’s reasonable judgment, does not represent a promotion from his or her status, title, position or responsibilities as in effect immediately prior thereto; the assignment to the Participant of any duties or responsibilities which, in the Participant’s reasonable judgment, are inconsistent with such status, title, position or responsibilities; or any removal of the Participant from or failure to reappoint or reelect him or her to any of such positions, except in connection with the termination of his or her employment for disability, for Cause, as a result of his or her death or by the Participant other than for Good Reason;
(ii) a reduction by the Company in the Participant’s Base Salary as in effect immediately prior to the Change in Control or as the same may be increased from time to time, or a failure to increase Participant’s Base Salary as of his or her established annual salary review date in any calendar year by a percentage at least as great as the annual increase in the Consumer Price Index for All Urban Consumers and for All Items most recently published by the United States Bureau of Labor Statistics prior to such salary review date;
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(iii) the Company’s requiring the Participant to be based at any place outside a 30-mile radius from the Participant’s business office location immediately prior to the Change in Control, except for reasonably required travel on Company business which is not materially greater than such travel requirements prior to the Change in Control;
(iv) the failure by the Company to continue to provide the Participant with compensation and benefits substantially similar (in terms of benefit levels and/or reward opportunities) to those provided for under the Participant’s Employment Agreement, if applicable, and those provided to him or her under any of the employee benefit plans in which the Participant becomes a participant, or the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Participant of any material fringe benefit enjoyed by him or her at the time of the Change in Control;
(v) any material breach by the Company of any provision of the Participant’s Employment Agreement with the Company, if applicable; and
(vi) the failure of the Company to notify the Participant within the 30-day period following any transfer of business and assets to any other person by merger, consolidation, sale of assets or otherwise, that the Company has obtained a satisfactory agreement from a successor or assign of the Company to assume and agree to perform the Participant’s Employment Agreement.
(k) “ Operating Unit ”, for any fiscal year, shall mean a division, Company subsidiary, group, product line or product line grouping for which an income statement reflecting sales and operating income is produced.
(l) “ Participant ”, for any fiscal year, shall mean an Employee selected by the Committee to participate in the Plan for such fiscal year.
(m) “ Performance Objectives ”, for any fiscal year, shall mean:
(i) For the Company and or Operating Unit(s) - one or more financial performance objectives of the Company and/or Operating Unit(s) established by the Committee in accordance with Section 4, which may include threshold Performance Objectives, target Performance Objectives and maximum Award Performance Objectives. Performance Objectives may be expressed in terms of earnings per share, earnings, return on assets, return on invested capital, revenue, operating income, cash flow, total shareholder return, net income, same store sales (measured by volume or percentage growth and for company, franchised or all stores) or any combination thereof. Any of these Performance Objectives may be expressed as an objective before specified items. Performance Objectives may be expressed as a combination of Company and/or Operating Unit(s) Performance Objectives and may be absolute or relative (to prior performance or to the performance of one or more other entities or external indices) and may be expressed in terms of a progression within a specified range.
(ii) For the individual – performance ratings, as measured in the annual performance review process for the applicable fiscal year.
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Exhibit 10(f)
FIRST AMENDMENT TO THE
WENDY’S INTERNATIONAL, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
WHEREAS , Wendy’s International, Inc. (the “Company”) adopted the Wendy’s International, Inc. Supplemental Executive Retirement Plan, as amended and restated effective January 1, 2003 (the “Plan”); and
WHEREAS , the Company wishes to amend the Plan effective as of December 31, 2006.
NOW, THEREFORE , the Company amends the Plan as follows:
1. The introduction to the Plan which precedes Article I is amended by inserting the following at its current end:
The SERP is intended to be a grandfathered plan exempt from the requirements of Code section 409A, and the Company shall administer and interpret the SERP to maintain such status.
2. Section 2.1 of the Plan is amended to read as follows:
| 2.1 | ELIGIBILITY |
Each Covered Employee who was an Active Participant in the SERP on the day prior to the Effective Date shall continue to be an Active Participant in the SERP on the Effective Date if still a Covered Employee on that date.
Any other Covered Employee shall become a Participant in the SERP on the latest of the Effective Date, the first day of the Plan Year following the date the Employee became a Covered Employee (the Covered Employee’s date of hire or promotion into eligible employment), or the Entry Date upon which the Covered Employee becomes a Match Eligible Participant in the Profit Sharing Plan; provided that, in no event shall a Covered Employee become a Participant after December 31, 2004.
3. Section 3.1(a) of the Plan is amended to read as follows:
| 3.1(a) | On the last day of each Plan Year commencing after December 31, 2002 but prior to January 1, 2005, for each Active Participant who remains employed as a Covered Employee by the Company or a Participating Employer on the last day of the Plan Year, or who dies, becomes disabled or attains Normal Retirement Age during the Plan Year while actively employed, the Company shall credit to the Supplemental Account of such Active Participant an amount determined as follows: |
| 1) | For each Active Participant described above who is not a Grandfather Eligible Participant, an amount equal to the net supplemental credit described in (b) below. |
| 2) | For each Grandfather Eligible Participant described above, an amount equal to the greater of the net supplemental credit described in (b) below and the target credit which would have been credited to such Participant for such Plan Year under Section 3.2(b). |
4. Section 3.1(c) of the Plan is amended to read as follows:
| 3.1(c) | Interest . On the last day of each Plan Year, interest shall be credited to the Supplemental Account as of that date but before crediting the allocation for that Plan Year (if any) under this Section, for each Participant at a rate equal to: |
| 1) | From the Effective Date to December 31, 2007, the interest rate applied for that Plan Year to the Account Balance Benefit under the Pension Plan. |
|
2) |
From January 1, 2008, the 30 year Constant Maturity Treasury Rate (or the next longest US government bond rate then available) as of November 30 th . |
5. Section 3.2(c) of the Plan is amended to read as follows:
| 3.2(c) | An amount equal to the interest rate described below applied to the amount in the Participant’s Supplemental Target Account as of the last day of the Plan Year or, for purposes of Section 3.2(a)(3), as of the Participant’s Normal Retirement Date. |
| 1) | From the Effective Date to December 31, 2007, the interest rate applied for that Plan Year to the Account Balance Benefit under the Pension Plan; and |
|
2) |
From January 1, 2008, the 30 year Constant Maturity Treasury Rate (or the next longest US government bond rate then available) as of November 30 th . |
6. Section 3.3 of the Plan is amended to read as follows:
| 3.3 | CREDITS TO SUPPLEMENTAL PROFIT SHARING ACCOUNT |
The Company shall credit or charge, as applicable, to each Participant’s Supplemental Profit Sharing Accounts the following amounts:
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| a) | For each Plan Year prior to January 1, 2003 during which the Participant is an Active Participant in the Profit Sharing and Savings Plan, the amount by which: |
| (1) | The amount of Company Contributions which the Company would have allocated to the Active Participant’s Accounts under the Profit Sharing and Savings Plan without regard to the maximum annual limitations imposed by Section 415 of the Code or the limitation on compensation imposed by Section 401(a)(17) of the Code; exceeds |
| (2) | The actual amount of Company Contributions which the Company allocates to the Active Participant’s Accounts under the Profit Sharing and Savings Plan. |
| b) | For each Plan Year from January 1, 2003 to December 31, 2006, during which the Participant is an Active Participant, an Inactive Participant or a former Participant in the Profit Sharing and Savings Plan, an amount equal to the net gain (or net loss) that would have been credited (or charged) had the amounts allocated to the Participant’s Supplemental Plan Accounts been invested in a manner similar to the investment of his Accounts under the Profit Sharing and Savings Plan during a similar time frame. |
If the Participant does not have any actual Accounts under the Profit Sharing and Savings Plan, his Supplemental Plan Accounts shall be treated as though they had been invested in the default investment offered under the Profit Sharing and Savings Plan (as referenced in Section 16.1 of such plan, or any successor section thereto).
| c) | On the last day of each Plan Year commencing after December 31, 2006, interest shall be credited to the Participant’s Supplemental Profit Sharing Account as of the last day of the Plan Year at a rate equal to: |
| 1) | For the Plan Year commencing January 1, 2007, the interest rate applied for that Plan Year to the Account Balance Benefit under the Pension Plan; and |
|
2) |
For Plan Years commencing after December 31, 2007, the 30 year Constant Maturity Treasury Rate (or the next longest US government bond rate then available) as of November 30 th . |
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IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its duly authorized officer this 28 th day of December, 2006.
| WENDY’S INTERNATIONAL, INC. | ||
| By: |
/s/ Dana Klein |
|
|
Name: Dana Klein |
||
|
Its: |
Dana Klein | |
|
SVP, Associate General Counsel & Assistant Secretary |
||
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Exhibit 10(g)
WENDY’S INTERNATIONAL, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN NO. 2
(EFFECTIVE JANUARY 1, 2005)
WENDY’S INTERNATIONAL, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Wendy’s International, Inc. maintains the Wendy’s International, Inc. Pension Plan and the Wendy’s International, Inc. Profit Sharing and Savings Plan for the benefit of its non-crew employees. From 1984 to 2004, the Company also maintained the Supplemental Executive Retirement Plan to provide benefits in excess of those permitted in the Pension and Profit Sharing and Savings Plans under the Internal Revenue Code. Following the enactment of Code section 409A, the Company froze contributions credited under the Supplemental Executive Retirement Plan to maintain the grandfathered status of that plan under Code section 409A. The Company has adopted this Supplemental Executive Retirement Plan No. 2 (the “SERP”) to provide benefits in compliance with the provisions of Code section 409A. This SERP shall be interpreted in conformity with the requirements of Code section 409A.
ARTICLE I – DEFINITIONS
Whenever used herein with the initial letter capitalized and unless a different meaning is plainly required by the context, words and phrases shall have (a) the meanings stated below, (b) if not stated below, the meanings given to them in the Profit Sharing and Savings Plan, if defined under that plan, or (c) if not defined in either the SERP or the Profit Sharing and Savings Plan, the meanings given to them in the Pension Plan. All masculine terms shall include the feminine and all singular terms shall include the plural, unless the context clearly indicates the gender or the number.
| 1.1 | ACCOUNT means a notional account established for each Participant equal to the sum of the following: (a) all supplemental contributions and interest credited under Section 3.1, (b) all supplemental target contributions and interest credited under Section 3.2, and (c) all supplemental profit sharing contributions and interest credited under Section 3.3. |
| 1.2 | ACTIVE PARTICIPANT means a Covered Employee who becomes a Participant and continues to participate in the SERP pursuant to Article II. |
| 1.3 | BENEFICIARY means any person or persons designated by a Participant to receive any death benefits that may become payable under Article IV after the death of such Participant. |
| 1.4 | BOARD means the Board of Directors of the Company, or a committee thereof. |
| 1.5 | CAUSE means the termination of a Participant’s employment by reason of the Board’s good faith determination that the Participant (a) willfully and continually failed to substantially perform his or her duties with the Company or Participating Employer (other than a failure resulting from the Participant’s incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Participant by the Board which specifically identifies the manner in which the Board believes that the Participant has not substantially performed his or her duties and such failure substantially to perform continues for at least fourteen (14) days, or (b) has willfully engaged in conduct which is demonstrably and materially injurious to the Company or Participating Employer, monetarily or otherwise, or (c) has otherwise materially breached the terms of his or her employment agreement with the Company or Participating Employer, if applicable (each, an “Employment Agreement”) (including, without limitation, a voluntary termination of the Participant’s employment by the Participant during the term of such Employment Agreement). No act, nor failure to act, on the Participant’s part, shall be considered “willful” unless he or she has acted, or failed to act, with an absence of good faith and without a reasonable belief that his or her action or failure to act was in the best interest of the Company. Notwithstanding the foregoing, the Participant’s employment shall not be deemed to have been terminated for Cause unless and until (1) there shall have been delivered to the Participant a copy of a written notice setting forth that the Participant was guilty of conduct set forth above in clause (a), (b) or (c) of the first sentence of this definition and specifying the particulars thereof in detail, and (2) the Participant shall have been provided an opportunity to be heard by the Board (with the assistance of Participant’s counsel). |
| 1.6 | CHANGE IN CONTROL means the occurrence during the Plan Year of: |
| a) |
An acquisition (other than directly from the Company) of any common stock or other voting securities of the Company entitled to vote generally for the election of directors (the “Voting Securities”) by any “Person” (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), immediately after which such Person has “Beneficial Ownership” (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of thirty percent (30%) or more of the then outstanding shares of the Company’s common stock or the combined voting power of the Company’s then outstanding Voting Securities; provided , however , in determining whether a Change in Control has occurred, Voting Securities which are acquired in a “Non-Control Acquisition” (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A “Non-Control Acquisition” shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof) maintained by (A) the Company or (B) any corporation or other Person of which a majority of its voting power or |
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its voting equity securities or equity interest is owned, directly or indirectly, by the Company (for purposes of this definition, a “Subsidiary”) (ii) the Company or its Subsidiaries, or (iii) any Person in connection with a “Non-Control Transaction” (as hereinafter defined); |
| b) | The individuals who, as of January 1, 2003, are members of the Board (the “Incumbent Board”), cease for any reason to constitute at least seventy percent (70%) of the members of the Board; provided , however , that if the election, or nomination for election by the Company’s common stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this SERP, be considered as a member of the Incumbent Board; provided further , however , that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of an actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a “Proxy Contest”) including by reason of any agreement intended to avoid or settle any Proxy Contest; or |
| c) | The consummation of: |
| 1) | A merger, consolidation or reorganization with or into the Company, or in which securities of the Company are issued (a “Merger”), unless such Merger is a “Non-Control Transaction.” A “Non-Control Transaction” shall mean a Merger if: |
| A) | the stockholders of the Company, immediately before such Merger own directly or indirectly immediately following such Merger at least seventy percent (70%) of the combined voting power of the outstanding voting securities of the corporation resulting from such Merger (the “Surviving Company”) in substantially the same proportion as their ownership of the Voting Securities immediately before such Merger, |
| B) | the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such Merger constitute at least two-thirds of the members of the board of directors of the Surviving Company, or a corporation beneficially directly or indirectly owning a majority of the Voting Securities of the Surviving Company, and |
| C) |
no Person other than (i) the Company, (ii) any Subsidiary, (iii) any employee benefit plan (or any trust forming a part thereof) that, immediately prior to such Merger was maintained by the Company or any Subsidiary, or (iv) any |
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Person who, immediately prior to such Merger had Beneficial Ownership of thirty percent (30%) or more of the then outstanding Voting Securities or common stock of the Company, has Beneficial Ownership of thirty percent (30%) or more of the combined voting power of the Surviving Company then outstanding voting securities or its common stock; |
| 2) | A complete liquidation or dissolution of the Company; or |
| 3) | The sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary). |
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the “Subject Person”) acquired Beneficial Ownership of more than the permitted amount of the then outstanding common stock or Voting Securities as a result of the acquisition of common stock or Voting Securities by the Company which, by reducing the number of shares of common stock or Voting Securities then outstanding, increases the proportional number of shares Beneficially Owned by the Subject Persons, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of common stock or Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional common stock or Voting Securities which increase the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur.
| 1.7 | CODE means the Internal Revenue Code of 1986, as amended from time to time. |
| 1.8 | COMMITTEE means the Administrative Committee established in Article V. |
| 1.9 | COMPANY means Wendy’s International, Inc., an Ohio corporation. |
| 1.10 | COMPENSATION means a Participant’s annual Compensation, as that term is defined in the Profit Sharing and Savings Plan, except that there shall be no maximum amount of Compensation considered. |
| 1.11 | CONTRIBUTIONS means the amounts credited to a Participant’s Account during a Plan Year, other than interest, pursuant to Article III. |
| 1.12 | COVERED EMPLOYEE means an Employee who, on or before October 26, 2006 has been appointed to serve as an officer: |
| a) | For the Company, with the title of “Vice President” or above; or |
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| b) | For any Participating Employer, with such titles as may be designated for that Participating Employer by the Board or a committee thereof. |
| 1.13 | EFFECTIVE DATE means January 1, 2005, the effective date of this SERP. |
| 1.14 | EMPLOYEE means a person employed by the Company or a Participating Employer who is a United States citizen or resident alien. |
| 1.15 | FINAL AVERAGE COMPENSATION shall mean a Participant’s average annual Compensation over the five (5) consecutive calendar years while a Covered Employee (or the total number of completed calendar years while a Covered Employee if less than five (5)) out of the last ten (10) completed calendar years while a Covered Employee preceding the Participant’s attainment of age sixty (60) which will provide him with the highest annual average Compensation. |
| 1.16 | GRANDFATHER ELIGIBLE PARTICIPANT shall mean a Participant who was an Active Participant in the Wendy’s International, Inc. Supplemental Executive Retirement Plan on January 1, 2003, and who had attained age 55 and completed at least five (5) Years of Service as of that date. |
| 1.17 | INACTIVE PARTICIPANT means a former Active Participant who is no longer a Covered Employee but who has an Account remaining in the SERP. |
| 1.18 | NORMAL RETIREMENT DATE and NORMAL RETIREMENT AGE both mean the first of the month coincident with or next following a Participant’s sixty-fifth birthday. |
| 1.19 | PARTICIPANT means an Active Participant or an Inactive Participant |
| 1.20 | PARTICIPATING EMPLOYER means an Affiliate, as defined in the Profit Sharing and Savings Plan, that has been authorized to participate in the SERP by the Board or a committee thereof. |
| 1.21 | PENSION PLAN means the Wendy’s International, Inc. Pension Plan. |
| 1.22 | PROFIT SHARING AND SAVINGS PLAN means the Wendy’s International, Inc. Profit Sharing and Savings Plan. |
| 1.23 | PLAN YEAR means the calendar year. |
| 1.24 | SERP means the Wendy’s International, Inc. Supplemental Executive Retirement Plan No. 2. |
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| 1.25 | TOTAL AND PERMANENT DISABILITY means a physical or mental condition which qualifies a Participant for Social Security disability benefits or which qualifies such Participant to continue to receive benefits under the Company’s disability plan, after having received such benefits for twelve (12) months. |
| 1.26 | YEAR OF SERVICE means any Plan Year during which an Employee is credited with a Year of Service under the Profit Sharing and Savings Plan. |
ARTICLE II – ELIGIBILITY AND PARTICIPATION
| 2.1 | ELIGIBILITY |
Each Covered Employee who was an Active Participant in the Wendy’s International, Inc. Supplemental Executive Retirement Plan on the day prior to the Effective Date shall be an Active Participant in the SERP on the Effective Date if still a Covered Employee on that date.
Any other Covered Employee shall become a Participant in the SERP on the latest of the Effective Date, the first day of the Plan Year following the date the Employee became a Covered Employee (the Covered Employee’s date of hire or promotion into eligible employment), or the Entry Date upon which the Covered Employee becomes a Match Eligible Participant in the Profit Sharing Plan.
| 2.2 | REEMPLOYMENT FOLLOWING QUALIFIED MILITARY SERVICE |
Notwithstanding any provision of this SERP to the contrary, a Covered Employee who returns to employment following qualified military service shall be credited with such Contributions and Years of Service as required under Chapter 43 of Title 38 of the United States Code.
ARTICLE III – AMOUNT OF BENEFIT
| 3.1 | CREDITS TO SUPPLEMENTAL ACCOUNT |
| a) | On the last day of each Plan Year commencing after December 31, 2002, for each Active Participant who remains employed as a Covered Employee by the Company or a Participating Employer on the last day of the Plan Year, or who dies, becomes disabled or attains Normal Retirement Age during the Plan Year while actively employed, the Company shall credit to the Supplemental Account of such Active Participant an amount determined as follows: |
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| 1) | For each Active Participant described above who is not a Grandfather Eligible Participant, on the last day of each Plan Year commencing after December 31, 2002 but before January 1, 2007, an amount equal to the net supplemental credit described in (b) below. |
| 2) | For each Active Participant described above who is not a Grandfather Eligible Participant, on the last day of each Plan Year commencing after December 31, 2006, an amount equal to the net supplemental credit described in (c) below. |
| 3) | For each Grandfather Eligible Participant described above, an amount equal to the greater of the net supplemental credit described in (b) or (c) below, as applicable, and the target credit which would have been credited to such Participant for such Plan Year under Section 3.2(b). |
| b) | Net Supplemental Credit . For Plan Years beginning after December 31, 2004 but before December 31, 2006, the difference between the gross supplemental credit amount determined under the table in paragraph (1) below and the offsets set forth in paragraph (2) below. |
| 1) | Gross Supplemental Credit . |
|
Participant’s Age Plus Years of Service as of the first day of the Plan Year |
Supplemental Credits as a percentage of prior year Compensation |
|
|
Less than 40 |
5% | |
|
40-49 |
8% | |
|
50-59 |
11% | |
|
60-69 |
14% | |
|
70 or more |
18% |
| 2) | Offsets . The aggregate of (A) the amounts credited during the prior Plan Year to such Participant pursuant to Section 1.1(c) of the Pension Plan, (B) the amounts that would have been credited during the prior Plan Year to such Participant pursuant to Section 3.5 of the Profit Sharing and Savings Plan had the Participant elected to make Deferred Income Contributions to receive the maximum available Company Safe Harbor Matching Contribution, (C) any Company Contributions credited to such Participant during the prior Plan Year pursuant to Section 3.1 of the Profit Sharing and Savings Plan, and (D) that portion of all “social security” employment (FICA) taxes paid during the prior Plan Year by the Company or Participating Employer pursuant to Code section 3111(a). |
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| c) | Net Supplemental Credit . For Plan Years commencing January 1, 2007, the difference between the gross supplemental credit amount determined under the table in paragraph (1) below and the offsets set forth in paragraph (2) below. |
| 1) | Gross Supplemental Credit . |
|
Participant’s Age Plus Years of Service as of the first day of the Plan Year |
Supplemental Credits as a percentage of prior year Compensation |
|
|
Less than 40 |
2.5% | |
|
40-49 |
5% | |
|
50-59 |
7.5% | |
|
60 or more |
10% |
| 2) | Offsets . The aggregate of (A) the amounts that would have been credited during the prior Plan Year to such Participant pursuant to Section 3.5 of the Profit Sharing and Savings Plan had the Participant elected to make Deferred Income Contributions to receive the maximum available Company Safe Harbor Matching Contribution, (B) any Company Contributions credited to such Participant during the prior Plan Year pursuant to Section 3.1 of the Profit Sharing and Savings Plan, and (C) that portion of all “social security” employment (FICA) taxes paid during the prior Plan Year by the Company or Participating Employer pursuant to Code section 3111(a). |
| d) | Interest . On the last day of each Plan Year, interest shall be credited to the Supplemental Account as of that date but before crediting the allocation for that Plan Year (if any) under this Section, for each Participant at a rate equal to: |
| 1) | From the Effective Date to December 31, 2007, the interest rate applied for that Plan Year to the Account Balance Benefit under the Pension Plan. |
|
2) |
From January 1, 2008, the 30 year Constant Maturity Treasury Rate (or the next longest US government bond rate then available) as of November 30 th . |
| 3.2 | CREDITS TO SUPPLEMENTAL TARGET ACCOUNT |
| a) |
Except as provided in Section 3.4 below, prior to January 1, 2003, the Company shall credit to the Supplemental Target Account for each eligible Participant the amounts described below and after January 1, 2003, the |
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Company shall credit to the Supplemental Target Account the interest credits described in (c) below : |
| (1) | For each eligible and Active Participant who remains employed by the Company on the last day of the Plan Year, the amounts described in (b) below calculated as of the last day of the prior Plan Year and the amount described in (c) below calculated as of the last day of the Plan Year. |
| (2) | For each eligible and Active Participant who dies or becomes disabled during the Plan Year while actively employed, the amount described in (b) below calculated as of the last day of the prior Plan Year. For each eligible and Active Participant who died or became disabled during a Plan Year while actively employed and who has not yet received payment of his SERP benefits, the amount described in (c) below calculated as of the earlier of the last day of the Plan Year or the date as of which benefits are paid under the SERP. |
| (3) | For each eligible and Active Participant who attained Normal Retirement Age during the Plan Year while actively employed, the amount described in (b) below calculated as of such Participant’s Normal Retirement Date and the amount described in (c) below calculated from the Normal Retirement Date to the earlier of the last day of the Plan Year or the date as of which benefits are paid under the SERP. |
| b) | An amount which will provide each Participant with a targeted annual benefit payable as a life annuity at his Normal Retirement Date equal to the amount obtained, if any, when the sum of (2), (3), (4) and (5) below is subtracted from (1) below: |
| (1) | Fifty percent (50%) of the Participant’s Final Average Compensation (determined without salary projection) multiplied by a fraction, not exceeding one (1), the numerator of which is the number of the Participant’s expected Years of Service at his Normal Retirement Date and the denominator of which is fifteen (15). |
| (2) | The Participant’s expected Accrued Benefit Derived from Company Contributions at his Normal Retirement Date under the Pension Plan, assuming that the Participant had elected to make Participant Contributions to the Plan in each Plan Year such contributions as were permitted and that interest credited to the Account Balance Benefit for future years will be at the rate of 7.5%, including the Prior Plan Benefit and the Minimum Benefit. |
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| (3) | With regard to the Profit Sharing and Savings Plan, the sum of the Participant’s: |
| (i) | Company Matched Contribution Account; |
| (ii) | Company Contribution Account; |
| (iii) | Company Safe Harbor Matching Contribution Account calculated as if the Participant had elected to make Deferred Income Contributions to receive the maximum available Company Safe Harbor Matching Contribution and as if such contributions had earned interest at an annual rate of 7.5%; |
| (iv) | any prior distributions from such Accounts; and |
| (v) | future expected Company Safe Harbor Matching Contributions for each Plan Year until the Participant’s Normal Retirement Date equal to the Company Safe Harbor Matching Contribution deemed to have been received by the Participant for that Plan Year. |
Such amount shall be projected for the number of years from the earlier of the distribution of such Accounts to the Participant or the date of this calculation to the Participant’s Normal Retirement Date at an interest rate of seven and one-half percent (7.5%) compounded annually. In the event that such Profit Sharing and Savings Plan Accounts are distributed to the Participant on different dates, then this projection shall be applied separately to each distribution based upon the specific dates of distribution.
The total projected value shall be converted to a life annuity payable at the Participant’s Normal Retirement Date, using the interest rate published by the Pension Benefit Guaranty Corporation for use in calculating immediate annuities which is in effect on the first day of the Plan Year to the extent that such rate continues to be published. In the event that such rate is no longer published, the total projected value shall be converted using the applicable interest rate as defined in Code section 417(e)(3) for the lookback month of November preceding the first day of the Plan Year.
| (4) | The Participant’s Supplemental Profit Sharing Account projected and converted to a life annuity payable at his Normal Retirement Date in the same manner as the Profit Sharing and Savings Plan Accounts in (3) above. |
10
| (5) | The amount of the retirement income the Participant is entitled to receive pursuant to the Supplemental Retirement Agreement under the Nonqualified Plan. |
| c) | An amount equal to the interest rate described below applied to the amount in the Participant’s Supplemental Target Account as of the last day of the Plan Year or, for purposes of Section 3.2(a)(3), as of the Participant’s Normal Retirement Date. |
| 1) | From the Effective Date to December 31, 2007, the interest rate applied for that Plan Year to the Account Balance Benefit under the Pension Plan; and |
|
2) |
From January 1, 2008, the 30 year Constant Maturity Treasury Rate (or the next longest US government bond rate then available) as of November 30 th . |
| 3.3 | CREDITS TO SUPPLEMENTAL PROFIT SHARING ACCOUNT |
The Company shall credit or charge, as applicable, to each Participant’s Supplemental Profit Sharing Accounts the following amounts:
| a) | For each Plan Year prior to January 1, 2003 during which the Participant is an Active Participant in the Profit Sharing and Savings Plan, the amount by which: |
| (1) | The amount of Company Contributions which the Company would have allocated to the Active Participant’s Accounts under the Profit Sharing and Savings Plan without regard to the maximum annual limitations imposed by Section 415 of the Code or the limitation on compensation imposed by Section 401(a)(17) of the Code; exceeds |
| (2) | The actual amount of Company Contributions which the Company allocates to the Active Participant’s Accounts under the Profit Sharing and Savings Plan. |
| b) | For each Plan Year from January 1, 2003 to December 31, 2006,during which the Participant is an Active Participant, an Inactive Participant or a former Participant in the Profit Sharing and Savings Plan, an amount equal to the net gain (or net loss) that would have been credited (or charged) had the amounts allocated to the Participant’s Supplemental Plan Accounts been invested in a manner similar to the investment of his Accounts under the Profit Sharing and Savings Plan during a similar time frame. |
If the Participant does not have any actual Accounts under the Profit Sharing and Savings Plan, his Supplemental Plan Accounts shall be treated as though they had been invested in the default investment offered under
11
the Profit Sharing and Savings Plan (as referenced in Section 16.1 of such plan, or any successor section thereto).
| c) | On the last day of each Plan Year commencing after December 31, 2006, interest shall be credited to the Participant’s Supplemental Profit Sharing Account as of the last day of the Plan Year at a rate equal to: |
| 1) | For the Plan Year commencing January 1, 2007, the interest rate applied for that Plan Year to the Account Balance Benefit under the Pension Plan; and |
|
2) |
For Plan Years commencing after December 31, 2007, the 30 year Constant Maturity Treasury Rate (or the next longest US government bond rate then available) as of November 30 th . |
| 3.4 | CASH ELECTION |
Prior to January 1, 2003, each Active Participant who was projected to have five (5) or more Years of Service by the end of the Plan Year had been permitted to elect, prior to notification of the Target Credit (as determined under Section 3.2 above) for such Plan Year, to receive in cash the amount that would otherwise be credited to his Supplemental Target Account on the last day of such Plan Year. Payment of the vested Target Credits, which were elected to be taken as cash, shall be paid by the end of the month following the last day of the Plan Year for which the dollars are credited.
| 3.5 | TERMINATION BENEFIT |
If a Participant’s employment terminates for any reason on or after his Normal Retirement Age, after incurring a Total and Permanent Disability, as a result of death or after completing five (5) Years of Service, such Participant (or his Beneficiary in the event of the Participant’s death) shall be entitled to receive a benefit, payable in accordance with Article IV, equal to the balance of the Participant’s Account. If a Participant’s employment is terminated for any reason prior to the earliest of attaining his Normal Retirement Age, incurring a Total and Permanent Disability, the date of his death or completing five (5) Years of Service, then notwithstanding any contrary provision in this SERP, neither the Participant nor his Beneficiary shall be entitled to any benefits under this SERP.
Notwithstanding the foregoing, the Participant shall be entitled to receive a benefit payable in accordance with Article IV, equal to the balance of the Participant’s Account, if the Participant’s employment is terminated by the Company without Cause within two years following a Change in Control or prior to the date of a Change in Control if the Participant reasonably demonstrates that the termination (a) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control or (b) otherwise arose in
12
connection with, or in anticipation of, a Change in Control which has been threatened or proposed, such termination shall be deemed to have occurred after a Change in Control for purposes of this Agreement provided a Change in Control shall actually have occurred.
ARTICLE IV – FORMS OF PAYMENT
| 4.1 | DISTRIBUTION OF BENEFITS |
| a) | Normal Form . Unless a Participant elects one of the distribution alternatives described in Section 4.1(b) in the manner set forth in Section 4.1(c), upon the Participant’s Termination (other than for death, Total and Permanent Disability or a Termination described in Section 7.3 or 7.5), the Participant will receive the distribution of his or her Accounts in a single lump sum on, or as soon as practicable after, the six month anniversary of the date of such Termination. |
| b) | Alternative Form . In the alternative, a Participant may elect to receive his or her Accounts in quarterly installments payable over no less than two years and no more than fifteen (15) years commencing on, or as soon as practicable after, the six-month anniversary of the date of such Termination, with the amount of each installment equal to the amount of the Account on the Valuation Date immediately prior to the payment of such installment divided by the number of installments remaining to be paid. |
| c) | Timing and Manner of Distribution Elections . Distribution elections shall be made in such manner as may be designated by the Plan Administrator and communicated to Participants. Any election made within twelve months of the date payment would otherwise commence (unless made within 30 days of becoming a Participant) shall be disregarded and benefits shall be paid in accordance with the preceding distribution election, if any, selected by such Participant or, if no such distribution election has been made, in accordance with Section 4.1. Effective January 1, 2006, any distribution election made more than 30 days after the Participant became an Eligible Individual shall delay the commencement of distributions to such Participant by five years from the date payments would have commenced in accordance with the preceding distribution election, if any, selected by such Participant or, if no such distribution election has been made, in accordance with Section 4.1. |
13
| 4.2 | Distributions on Total and Permanent Disability or Death . |
Notwithstanding the foregoing, in the event: (i) a Participant incurs a Termination by reason of such Participant’s Total and Permanent Disability or (ii) a Participant dies, whether before or after the payment of benefits has commenced hereunder, the Participant’s total Account Balance shall be paid in a single lump sum as soon as practicable after such occurrence but not later than the March 15 th of the year following the year in which such Termination occurs.
| 4.3 | Distributions on Change in Control . |
Notwithstanding the foregoing, if within two years following a Change in Control, a Participant’s employment with the Company and its Affiliates is involuntarily terminated without Cause or is terminated by the Participant for Good Reason, the Participant’s total Account Balance shall be paid in a single lump sum. Such lump sum:
|
(a) |
If the Participant is not a “specified employee” or if the Change in Control constitutes “a change in ownership or effective control of the Company” or a “change in the ownership of a substantial portion of the Company’s assets,” in each case within the meaning of Code section 409A, shall be paid as soon as practicable after such termination but not later than the March 15 th of the year following the year in which such termination occurs. |
| (b) | If both the Participant is a “specified employee” and the Change in Control does not constitute either “a change in ownership or effective control of the Company” or a “change in the ownership of a substantial portion of the Company’s assets,” in each case within the meaning of Code section 409A, shall be paid as soon as practicable after the first day of the calendar month following the date which is six (6) months after the date of the Participant’s termination. |
| 4.4 | DESIGNATION OF BENEFICIARY |
Each Participant shall designate, by giving a designation in approved form to the Plan Administrator, a Beneficiary to receive any benefits which may become or continue to be payable upon or after his death under this Plan. Successive designations may be made and the last designation received by the Plan Administrator prior to the death of the Participant shall be effective and shall revoke all prior designations.
If a Participant shall fail to designate a Beneficiary, if such designation shall for any reason be illegal or ineffective or if no Beneficiary so designated survives the Participant, then his benefits shall be paid to:
| a) | His surviving spouse; or |
14
| b) | If there is no surviving spouse, to the executor or other personal representative of the Participant to be distributed in accordance with the Participant’s will, or if he has no valid will, in accordance with applicable state law. |
ARTICLE V – PLAN ADMINISTRATION
| 5.1 | PLAN ADMINISTRATOR |
| a) | The Company shall be the Plan Administrator. The Company shall appoint a Committee to act as its agent or delegate in carrying out its administrative duties. |
| b) | The Committee shall consist of not fewer than three (3) members who shall be appointed by the Company and may include individuals who are not Participants in the Plan. The Company may remove or replace any member at any time in its sole discretion, and any member may resign by delivering a written resignation to the Company, which resignation shall become effective at its delivery or at any later date specified therein. |
| 5.2 | POWERS OF THE PLAN ADMINISTRATOR |
The Plan Administrator shall be charged with the operation and administration of the SERP in accordance with the terms hereof and shall have all the powers necessary to carry out the provisions of the SERP. Any and all determinations, actions or decisions of the Plan Administrator and Committee with respect to the administration of the SERP, including without limitation the determination of benefit eligibility and interpretation of SERP provisions, shall be final and conclusive and binding upon all parties having an interest in the SERP.
| 5.3 | COMMITTEE |
| a) |
The Committee shall hold meetings upon such notice and at such times and places as its members may from time to time deem appropriate, and may adopt from time to time such bylaws and regulations for the conduct and transaction of its business and affairs consistent with the terms of the Plan and the delegation of duties and powers by the Company. A majority of its members at the relevant time shall constitute a quorum for the transaction of business. All action taken by the Committee shall be by vote of the majority of its members present at such meeting, except that the Committee also may act without a meeting by a written consent signed by a majority of its members. A member shall not be disqualified from acting because of any personal interest, benefit or advantage, inasmuch as a member may be a director of the Company, an Employee or a |
15
|
Participant, but no member shall vote or act in connection with an action of the Committee relating exclusively to himself. |
| b) | The Committee may allocate among its members such specific responsibilities, obligations, powers or duties as shall be deemed appropriate. |
| 5.4 | INDEMNIFICATION |
The Company shall indemnify and defend each member of the Committee and all officers or representatives of the Company and Employees assigned fiduciary responsibility under Federal law to the greatest extent permitted by applicable law against any and all claims, losses, damages, expenses (including reasonable attorneys’ fees) and liability arising from any action or failure to act in connection with the SERP.
ARTICLE VI – CLAIMS PROCEDURES
| 6.1 | CLAIMS REVIEW |
Any Participant, former Participant or Beneficiary who wishes to request a review of a claim for benefits or who wishes an explanation of a benefit or its denial may direct to the Plan Administrator a written request for such review within one hundred twenty (120) days of the denial. The Plan Administrator shall respond to the request by issuing a notice to the claimant as soon as possible, but in no event later than ninety (90) days (one hundred eighty (180) days in special cases) from the date of receipt of the request. This notice furnished by the Plan Administrator shall be written in a manner calculated to be understood by the claimant and shall include the following:
| a) | The specific reason or reasons for any denial of benefits; |
| b) | The specific SERP provisions on which any denial is based; |
| c) | A description of any further material or information which is necessary for the claimant to perfect his claim and an explanation of why the material or information is needed; and |
d) An explanation of the SERP’s claim appeals procedure.
If the Plan Administrator denies the claim or fails to respond to the claimant’s written request for a review within one hundred eighty (180) days of its receipt, the claimant shall be entitled to proceed to the claim appeals procedure described in Section 6.2. If the claimant does not respond to the notice, posted by first-class
16
mail to the address of record of the claimant, within sixty (60) days from receipt of the notice, the claimant shall be considered satisfied in all respects.
| 6.2 | APPEALS PROCEDURE |
In the event that the claimant wishes to appeal the claim review denial, the claimant or his duly authorized representative may submit to the Plan Administrator, within sixty (60) days of his receipt of the notice, a written notification of appeal of the claim denial. The notification of appeal of the claim denial shall permit the claimant or his duly authorized representative to utilize the following claim appeals procedures:
| a) | To review pertinent documents; and |
| b) | To submit issues and comments in writing to which the Plan Administrator shall respond. |
The Plan Administrator shall furnish a final written decision on formal review not later than sixty (60) days after receipt of the notification of appeal, unless special circumstances require an extension of the time for processing the appeal. In no event, however, shall the Plan Administrator respond later than one hundred twenty (120) days after a request for an appeal. The decision on the appeal shall be written in a manner calculated to be understood by the claimant, shall include specific reasons for the decision, and shall contain specific references to the pertinent SERP provisions on which the decision is based.
| 6.3 | DISCRETION REGARDING CLAIMS AND APPEALS |
The Plan Administrator, or any individual or committee to whom responsibility for claims and appeals has been delegated, shall have complete discretion in deciding such claims and appeals and any such decision shall be final, conclusive and binding upon the claimant.
ARTICLE VII – MISCELLANEOUS
| 7.1 | AMENDMENT AND TERMINATION |
The SERP may be amended by the Company, by action of its Board or a committee thereof, at any time in its discretion and without the consent of any Participant. However, in the event of the amendment or termination of the SERP, any benefit accrued to such date shall not be reduced or forfeited without the consent of each affected Participant. Further, the SERP may not be amended or terminated for two years following the end of the Plan Year in which a Change in Control occurs or, prior to the date of a Change in Control, if an affected Participant reasonably demonstrates that the amendment or termination is had
17
been adopted (a) at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control or (b) otherwise in connection with, or in anticipation of, a Change in Control which has been threatened or proposed, in either case provided a Change in Control shall actually have occurred.
| 7.2 | NO CONTRACT OF EMPLOYMENT |
Nothing herein contained shall be construed to constitute a contract of employment between the Company and any Participant.
| 7.3 | UNFUNDED PLAN |
The SERP at all times shall be considered entirely unfunded both for tax purposes and for purposes of the Employee Retirement Income Security Act of 1974 (ERISA). Notwithstanding the foregoing, the Company may establish a benefits protection trust for the benefit of Participants with an independent bank as trustee. Prior to a Change in Control, the Company shall transfer to such trust assets equal to the Accounts of all Participants. Any benefits protection trust established to provide benefits under this SERP shall at all times remain subject to the claims of the Company’s general creditors in the event of insolvency.
| 7.4 | RESTRICTIONS UPON ASSIGNMENTS AND CREDITORS’ CLAIMS |
No benefit payable under this SERP shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge prior to actual receipt thereof by the Participant or Beneficiary and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge prior to such receipt shall be void. No benefit payable under this SERP shall be subject to attachment, garnishment, execution, levy or other legal or equitable proceeding or process, and any attempt to do so shall be void. The Company shall not be in any manner liable for or subject to the debts, contracts, liabilities, engagements or torts of any Participant or Beneficiary except as may be required by the tax withholding provisions of the Code or any state’s income tax laws.
| 7.5 | PAYMENT CONSTITUTES RELEASE |
Payment to the Participant or Beneficiary as set forth in Article IV shall completely discharge the Company’s obligations under this SERP, whether paid by a benefits protection trust established under Section 7.3 or directly by the Company.
| 7.6 | APPLICABLE LAW |
To the extent not preempted by Federal law, the SERP shall be construed and administered in accordance with the laws of the State of Ohio.
18
IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its duly authorized officer this 28 th day of December, 2006.
| WENDY’S INTERNATIONAL, INC. | ||
| By: |
/s/ Dana Klein |
|
| Name: Dana Klein | ||
| Dana Klein | ||
| Its: | SVP, Associate General Counsel & | |
| Assistant Secretary | ||
19
Exhibit 10(q)
STOCK UNIT AWARD AGREEMENT
(with related Dividend Equivalent Rights)
Wendy’s International, Inc.
, 20
THIS AGREEMENT, made as of , 20 (the “ Date of Grant ”), between Wendy’s International, Inc., an Ohio corporation (the “ Company ”), and (the “ Grantee ”).
WHEREAS, the Company has adopted the Wendy’s International, Inc. 2003 Stock Incentive Plan (the “ Plan ”) in order to provide additional incentive to certain employees and directors of the Company and its Subsidiaries; and
WHEREAS, the Committee has determined to grant to the Grantee an Award of Stock Units with related Dividend Equivalent Rights as provided herein to encourage the Grantee’s efforts toward the continuing success of the Company.
NOW, THEREFORE, the parties hereto agree as follows:
1. Grant .
1.1 Unless this Agreement is rejected by the Grantee (or the Grantee’s estate, if applicable) as provided in Section 8 hereof, the Company hereby grants to the Grantee an award (the “ Award ”) of Stock Units with an equal number of related Dividend Equivalent Rights. Subject to Section 6 hereof, each Stock Unit represents the right to receive one (1) Share at the time and in the manner set forth in Section 7 hereof.
1.2 Each Dividend Equivalent Right represents the right to receive all of the cash dividends that are or would be payable with respect to the Share represented by the Stock Unit to which the Dividend Equivalent Right relates. With respect to each Dividend Equivalent Right, any such cash dividends shall be converted into additional Stock Units based on the Fair Market Value of a Share on the date such dividend is made (provided that no fractional Stock Units shall be granted). Such additional Stock Units shall be subject to the same terms and conditions applicable to the Stock Unit to which the Dividend Equivalent Right relates, including, without limitation, the restrictions on transfer, forfeiture, vesting and payment provisions contained in Sections 2 through 7, inclusive, of this Agreement. In the event that a Stock Unit is forfeited pursuant to Section 6 or 8 hereof, the related Dividend Equivalent Right shall also be forfeited.
1.3 This Agreement shall be construed in accordance and consistent with, and subject to, the provisions of the Plan (the provisions of which are hereby incorporated by reference) and, except as otherwise expressly set forth herein, the
capitalized terms used in this Agreement shall have the same definitions as set forth in the Plan.
2. Restrictions on Transfer .
The Stock Units granted pursuant to this Agreement may not be sold, transferred or otherwise disposed of and may not be pledged or otherwise hypothecated.
3. Vesting .
Except as provided in Sections 4 and 5 hereof, all of the number of Stock Units granted hereunder (rounded up to the next whole Stock Unit, if necessary) shall vest on [Date] (the “ Vesting Date ”).
4. Effect of Certain Terminations of Employment .
If the Grantee’s employment terminates as a result of the Grantee’s death, Retirement or becoming Disabled, or if the Grantee is terminated without Cause in connection with the disposition of one or more restaurants or other assets of the Company or its Subsidiaries or the sale or disposition of a Subsidiary (a “ Sale Termination ”), in each case if such termination occurs on or after the Date of Grant, all Stock Units which have not become vested in accordance with Section 3 or 5 hereof shall vest as of the date of such termination.
5. Effect of Change in Control .
5.1 In the event of a Change in Control for an event described in section 29.6(c) of the Plan which also constitutes a change in ownership or effective control of the Company or a change in the ownership of a substantial portion of its assets, in each case within the meaning of Section 409A of the Code, at any time on or after the Date of Grant, all Stock Units which have not become vested in accordance with Section 3 or 4 hereof shall vest immediately.
5.2 In the event that a Grantee terminates employment within a period commencing on the date of a Change in Control for an event described in section 29.6(a) or (b) of the Plan and ending on the Vesting Date if such termination was initiated by the Company or its Subsidiary without Cause or by the Grantee for Good Reason, at any time on or after the Date of Grant, all Stock Units which have not become vested in accordance with Section 3 or 4 hereof shall vest as of the date of such termination.
6. Forfeiture of Stock Units .
In addition to the circumstance described in Section 8 hereof, any and all Stock Units which have not become vested in accordance with Section 3, 4 or 5 hereof shall be forfeited and shall revert to the Company upon:
2
(i) the termination of the Grantee’s employment with the Company or any Subsidiary for any reason other than those set forth in Section 4 hereof prior to such vesting; or
(ii) the commission by the Grantee of an Act of Misconduct prior to such vesting.
For purposes of this Agreement, an “ Act of Misconduct ” shall mean the occurrence of one or more of the following events: (x) the Grantee uses for profit or discloses to unauthorized persons, confidential information or trade secrets of the Company or any of its Subsidiaries, (y) the Grantee breaches any contract with or violates any fiduciary obligation to the Company or any of its Subsidiaries, or (z) the Grantee engages in unlawful trading in the securities of the Company or any of its Subsidiaries or of another company based on information gained as a result of that Grantee’s employment with, or status as a director to, the Company or any of its Subsidiaries.
7. Issuance of Shares .
On the Vesting Date, or as soon thereafter as administratively practicable, the Company shall issue Shares to the Grantee (or, if applicable, the Grantee’s estate) with respect to Stock Units that become vested on the Vesting Date. Shares with respect to Stock Units that become vested pursuant to Section 4 or Section 5 shall be issued upon the date such Stock Units become vested, or as soon thereafter as administratively practicable; provided , however , that if the Grantee is a “specified employee” within the meaning of Section 409A of the Code as of the date of the Grantee’s termination of employment based on the Grantee’s Share ownership (at least 1% of the outstanding Shares) or compensation relative to other employees (in the top 50) and determined in accordance with policies and procedures adopted by the Company, any Shares with respect to Stock Units which have become vested pursuant to Section 4 due to the termination of the Grantee’s employment as a result of the Grantee’s Retirement, a Sale Termination, or the Grantee becoming Disabled (other than a Disability which constitutes a disability within the meaning of Section 409A of the Code) shall be issued as soon as administratively practicable after the first day of the calendar month following the date which is six (6) months after the date of the Grantee’s termination of employment.
8. Rejection of Award Agreement .
The Grantee may reject this Agreement and forfeit the Stock Units and Dividend Equivalent Rights granted to the Grantee pursuant to the Award by notifying the Company or its designee in the manner prescribed by the Company and communicated to the Grantee; provided that such rejections must be received by the Company or its designee no later than the earlier of (i) [Date] and (ii) the date that is immediately prior to the date that the Stock Units vest pursuant to Section 4 or 5 hereof (the “ Grantee Return Date ”); provided further that if the Grantee dies before the Grantee Return Date, the Grantee’s
3
estate may reject this Agreement no later than ninety (90) days following the Grantee’s death (the “ Executor Return Date ”). If this Agreement is rejected on or prior to the Grantee Return Date or the Executor Return Date, as applicable, the Stock Units and Dividend Equivalent Rights evidenced by this Agreement shall be forfeited, and neither the Grantee nor the Grantee’s heirs, executors, administrators and successors shall have any rights with respect thereto.
9. No Right to Continued Employment .
Nothing in this Agreement or the Plan shall interfere with or limit in any way the right of the Company or its Subsidiaries to terminate the Grantee’s employment, nor confer upon the Grantee any right to continuance of employment by the Company or any of its Subsidiaries or continuance of service as a Board member.
10. Withholding of Taxes .
Prior to the delivery to the Grantee (or the Grantee’s estate, if applicable) of Shares pursuant to Sections 1 and 7 hereof, the Grantee (or the Grantee’s estate) shall pay to the Company the federal, state and local income taxes and other amounts as may be required by law to be withheld by the Company (the “ Withholding Taxes ”) with respect to such Shares. By not rejecting this Agreement in the manner provided in Section 8 hereof, the Grantee (or the Grantee’s estate) shall be deemed to elect to have the Company withhold a portion of such Shares having an aggregate Fair Market Value equal to the Withholding Taxes in satisfaction of the Withholding Taxes, such election to continue in effect until the Grantee (or the Grantee’s estate) notifies the Company at least 4 days prior to the Vesting Date that the Grantee (or the Grantee’s estate) shall satisfy such obligation in cash, in which event the Company shall not withhold a portion of such Shares as otherwise provided in this Section 10.
11. Grantee Bound by the Plan .
The Grantee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all the terms and provisions thereof.
12. Modification of Agreement .
This Agreement may be modified, amended, suspended or terminated, and any terms or conditions may be waived, but only by a written instrument executed by the parties hereto.
13. Severability .
Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement shall not be affected by such holding and shall continue in full force in accordance with their terms.
4
14. Governing Law .
The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Ohio without giving effect to the conflicts of laws principles thereof.
15. Successors in Interest .
This Agreement shall inure to the benefit of and be binding upon any successor to the Company. This Agreement shall inure to the benefit of the Grantee’s legal representatives. All obligations imposed upon the Grantee and all rights granted to the Company under this Agreement shall be binding upon the Grantee’s heirs, executors, administrators and successors.
16. Resolution of Disputes .
Any dispute or disagreement which may arise under, or as a result of, or in any way relate to, the interpretation, construction or application of this Agreement shall be determined by the Committee. Any determination made hereunder shall be final, binding and conclusive on the Grantee, the Grantee’s heirs, executors, administrators and successors, and the Company and its Subsidiaries for all purposes.
17. Entire Agreement .
This Agreement and the terms and conditions of the Plan constitute the entire understanding between the Grantee and the Company and its Subsidiaries, and supersede all other agreements, whether written or oral, with respect to the Award.
18. Headings .
The headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement.
| WENDY’S INTERNATIONAL, INC. | ||
| By: | ||
| Name: | ||
| Title: | ||
5
Exhibit 10(y)
EXECUTION COPY
STOCK PURCHASE AGREEMENT
by
and
between
WENDY’S INTERNATIONAL, INC.
and
CALIBER CAPITAL GROUP, LLC.
Dated: October 11, 2006
TABLE OF CONTENTS
|
ARTICLE 1. DEFINITIONS |
1 | |||
|
ARTICLE 2. PURCHASE AND SALE OF SHARES |
10 | |||
|
2.1 |
Basic Transaction. | 10 | ||
|
2.2 |
Purchase Price. | 10 | ||
|
2.3 |
Purchase Price Adjustment. | 10 | ||
|
2.4 |
Closing. | 11 | ||
|
2.5 |
Deliveries at Closing. | 12 | ||
|
ARTICLE 3. REPRESENTATIONS AND WARRANTIES CONCERNING TRANSACTION |
13 | |||
|
3.1 |
Seller’s Representations and Warranties. | 13 | ||
|
3.2 |
Buyer’s Representations and Warranties. | 14 | ||
|
ARTICLE 4. REPRESENTATIONS AND WARRANTIES CONCERNING ACQUIRED ENTITIES |
15 | |||
|
4.1 |
Organization and Qualification. | 15 | ||
|
4.2 |
Capitalization. | 16 | ||
|
4.3 |
Noncontravention. | 16 | ||
|
4.4 |
Records. | 16 | ||
|
4.5 |
Brokers’ Fees. | 16 | ||
|
4.6 |
Title to and Condition of Assets; Restaurants. | 16 | ||
|
4.7 |
Acquired Subsidiaries. | 17 | ||
|
4.8 |
Financial Statements. | 17 | ||
|
4.9 |
Subsequent Events. | 18 | ||
|
4.10 |
Legal Compliance. | 20 | ||
|
4.11 |
Tax Matters. | 21 | ||
|
4.12 |
Real Property. | 22 | ||
|
4.13 |
Franchise Matters. | 23 | ||
|
4.14 |
Intellectual Property. | 29 | ||
|
4.15 |
Contracts. | 30 | ||
|
4.16 |
Litigation. | 31 | ||
|
4.17 |
Labor; Employees. | 31 | ||
|
4.18 |
Employee Benefits. | 32 | ||
|
4.19 |
Environmental, Health, and Safety Matters. | 34 | ||
|
4.20 |
Permits. | 35 | ||
|
4.21 |
Insurance. | 35 | ||
|
4.22 |
Certain Business Relationships with Acquired Entities. | 36 | ||
|
4.23 |
Suppliers. | 36 | ||
|
4.24 |
Notes and Accounts Receivable. | 36 | ||
|
4.25 |
Disclaimer of Other Representations and Warranties. | 37 | ||
|
ARTICLE 5. PRE-CLOSING COVENANTS |
37 | |||
|
5.1 |
General. | 37 | ||
|
5.2 |
Notices and Consents. | 37 | ||
|
5.3 |
Operation of Business; Assumption of Certain Liabilities. | 38 | ||
|
5.4 |
Full Access. | 38 | ||
|
5.5 |
Notice of Developments. | 39 | ||
|
5.6 |
Affiliated Transactions. | 39 | ||
i
|
5.7 |
Repayment of Liabilities from Seller. | 39 | ||
|
5.8 |
Discharge of Liabilities to Seller. | 39 | ||
|
5.9 |
Exclusivity. | 40 | ||
|
5.10 |
Satisfaction of Certain Intercompany Accounts. | 40 | ||
|
5.11 |
Insurance Claims. | 40 | ||
|
ARTICLE 6. POST-CLOSING COVENANTS |
40 | |||
|
6.1 |
General. | 40 | ||
|
6.2 |
Tax Matters. | 41 | ||
|
6.3 |
Employment and Benefits Matters. | 43 | ||
|
6.4 |
Net Working Capital Adjustment. | 45 | ||
|
6.5 |
Transition. | 45 | ||
|
6.6 |
Transition Services. | 45 | ||
|
6.7 |
Confidentiality. | 45 | ||
|
ARTICLE 7. CONDITIONS TO OBLIGATION TO CLOSE |
45 | |||
|
7.1 |
Conditions Precedent to Buyer’s Obligation. | 45 | ||
|
7.2 |
Conditions Precedent to Seller’s Obligation. | 47 | ||
|
ARTICLE 8. INDEMNIFICATION |
48 | |||
|
8.1 |
Survival of Representations and Warranties. | 48 | ||
|
8.2 |
Indemnification Provisions for Buyer’s Benefit. | 48 | ||
|
8.3 |
Indemnification Provisions for Seller’s Benefit. | 49 | ||
|
8.4 |
Indemnification Claim Procedures. | 49 | ||
|
8.5 |
Limitations on Indemnification Liability. | 50 | ||
|
8.6 |
Sophistication of Buyer. | 51 | ||
|
8.7 |
Other Indemnification Provisions. | 52 | ||
|
8.8 |
Exclusive Remedy. | 52 | ||
|
ARTICLE 9. TERMINATION |
52 | |||
|
9.1 |
Termination of Agreement. | 52 | ||
|
9.2 |
Effect of Termination. | 53 | ||
|
ARTICLE 10. MISCELLANEOUS |
53 | |||
|
10.1 |
Press Releases and Public Announcements. | 53 | ||
|
10.2 |
No Third-Party Beneficiaries. | 53 | ||
|
10.3 |
No Code Section 338 Election. | 54 | ||
|
10.4 |
Entire Agreement. | 54 | ||
|
10.5 |
Succession and Assignment. | 54 | ||
|
10.6 |
Counterparts. | 54 | ||
|
10.7 |
Headings. | 54 | ||
|
10.8 |
Notices. | 54 | ||
|
10.9 |
Governing Law. | 56 | ||
|
10.10 |
Amendments and Waivers. | 56 | ||
|
10.11 |
Severability. | 56 | ||
|
10.12 |
Expenses. | 56 | ||
|
10.13 |
Construction. | 56 | ||
|
10.14 |
Incorporation of Exhibits, Annexes, and Schedules. | 57 | ||
ii
ATTACHMENTS
|
Exhibits |
||
|
Exhibit A |
Form of Seller’s Officer’s Certificate | |
|
Exhibit B |
Form of Seller’s Secretary’s Certificate | |
|
Exhibit C |
Form of Buyer’s Officer’s Certificate | |
|
Exhibit D |
Form of Buyer’s Secretary’s Certificate | |
|
Exhibit E |
Evidence of Resignations | |
|
Exhibit F |
Franchise Offering Circular dated as of May 18, 2006 | |
|
Schedules |
||
|
Schedule 3.2(c) |
Buyer Required Consents | |
|
Schedule 4.1 |
Officers and Directors | |
|
Schedule 4.3 |
Acquired Entities Required Consents | |
|
Schedule 4.6(a) |
Encumbrances | |
|
Schedule 4.7 |
Acquired Subsidiaries | |
|
Schedule 4.8 |
Financial Statements | |
|
Schedule 4.9 |
Subsequent Events | |
|
Schedule 4.11 |
Tax Matters | |
|
Schedule 4.12(b) |
Leased Property | |
|
Schedule 4.13(a) |
Franchise Agreements | |
|
Schedule 4.13(a)(ii) |
Breaches of Franchise Agreements | |
|
Schedule 4.13(a)(iii) |
Notice of Termination of Franchise Agreements | |
|
Schedule 4.13(a)(iv) |
Waivers/Consents of Franchise Agreement Provisions | |
|
Schedule 4.13(a)(v) |
Amendments to Franchise Agreement Provisions | |
|
Schedule 4.13(b) |
Financial Obligations of Franchisees | |
|
Schedule 4.13(c) |
Development Obligations of Franchisees | |
|
Schedule 4.13(d) |
Franchise Claims | |
|
Schedule 4.13(e) |
Franchisee Notices of Breach | |
|
Schedule 4.13(f) |
Franchise Registration Status | |
|
Schedule 4.13(g) |
Applications for Franchise Registration | |
|
Schedule 4.13(k)(iii) |
Director and Principal Officer Matters | |
|
Schedule 4.13(l) |
Franchise Sales Persons | |
|
Schedule 4.13(o) |
Franchisees with Terminated Franchise Agreements | |
|
Schedule 4.13(p) |
Franchisees with Transferred Agreements | |
|
Schedule 4.13(q) |
Pending Sales of Franchise Agreements | |
|
Schedule 4.13(r) |
Pending Transfers of Franchise Agreements | |
|
Schedule 4.13(s) |
Acknowledgement of Receipt of Franchise Offering Circular | |
|
Schedule 4.13(t) |
Forbearance Agreements, Purchase Agreements and Other Agreements regarding Restaurant Reacquisitions | |
|
Schedule 4.13(u) |
Disputes with Franchisees | |
|
Schedule 4.13(v) |
Notice of Breach or Termination against Franchisees | |
|
Schedule 4.13(w) |
Consent Order with Government Agencies | |
|
Schedule 4.13(x) |
Applications to State Agencies to Modify Franchise Agreements | |
iii
|
Schedule 4.14(b) |
Marks | |
|
Schedule 4.14(d) |
Ownership Exceptions | |
|
Schedule 4.14(e) |
Encumbrances on Intellectual Property | |
|
Schedule 4.14(f) |
Intellectual Property Violations | |
|
Schedule 4.15 |
Contracts | |
|
Schedule 4.16 |
Litigation | |
|
Schedule 4.17 |
Employee Contracts; Collective Bargaining Agreements; Employment Discrimination | |
|
Schedule 4.18(a) |
Employee Benefits | |
|
Schedule 4.18(g)(i) |
Employee Benefit Plans subject to Title IV of ERISA | |
|
Schedule 4.18(i) |
Post-Employment Benefits | |
|
Schedule 4.18(j) |
Parachute Payments | |
|
Schedule 4.19 |
Environmental, Health, and Safety Matters | |
|
Schedule 4.20 |
Permits | |
|
Schedule 4.21 |
Insurance | |
|
Schedule 4.22 |
Certain Business Relationships | |
|
Schedule 4.23 |
Supplier Notices | |
|
Schedule 5.1 |
Assigned Assets | |
|
Schedule 5.2(d) |
Required Lease Consents | |
|
Schedule 5.3 |
Terminated or Excluded Contracts | |
|
Schedule 5.6 |
Affiliated Transactions | |
|
Schedule 6.3(a) |
Excluded Employees | |
|
Schedule 6.3(a)(i) |
Change of Control Payments | |
|
Schedule 6.3(a)(ii) |
Cash Award Payments | |
|
Schedule 6.3(a)(iii) |
Retention Payments | |
|
Schedule 6.3(a)(iv) |
Employee Transition Payments in Excess of $150,000 | |
|
Schedule 6.6 |
Transition Services |
iv
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (this “ Agreement ”) is dated as of October 11, 2006, by and between Caliber Capital Group, LLC, a California limited liability company (“ Buyer ”), and Wendy’s International, Inc., an Ohio corporation (“ Seller ” and, together with Buyer, the “ Parties ”).
RECITALS:
A. Seller owns all of the outstanding capital stock of Fresh Enterprises, Inc., a California corporation (the “ Company ”).
B. Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, all of the Company’s outstanding capital stock for the consideration and on the terms and conditions set forth in this Agreement.
C. Buyer and Seller intend for the purchase and sale of all of the Company’s outstanding capital stock to be treated as a taxable purchase for tax purposes.
AGREEMENT:
In consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties, and covenants herein contained, the Parties agree as follows:
ARTICLE 1. DEFINITIONS
“ Acquired Entities ” means the Company and each of the Acquired Subsidiaries.
“ Acquired Subsidiary ” means any Subsidiary listed on Schedule 4.7 .
“ Action ” means any action, appeal, petition, plea, charge, complaint, claim, suit, demand, litigation, arbitration, mediation, hearing, inquiry, investigation or similar event, occurrence, or proceeding.
“ Affiliate ” or “ Affiliated ” with respect to any specified Person means a Person that, directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under
common control with, such specified Person.
“ Affiliated Group ” means any affiliated group within the meaning of Code Section 1504(a) or any similar group defined under a similar provision of state, local, or foreign law, of which any of the Acquired Entities was a member.
“ Agreement ” has the meaning set forth in the introductory paragraph of this Agreement.
“ Balance Sheet Date ” has the meaning set forth in Section 4.8 .
“ Breach ” means (a) any breach, inaccuracy, failure to perform, failure to comply, failure to notify, default, or violation or (b) any other act, omission, event, occurrence, or condition the existence of which would (i) permit any Person to accelerate any monetary obligation or terminate, or cancel or modify any right or obligation or (ii) require the payment of a monetary penalty.
“ Buyer ” has the meaning set forth in the introductory paragraph of this Agreement.
“ Buyer Closing Statement ” has the meaning set forth in Section 2.3(b)(i) .
“ Buyer Indemnified Parties ” means Buyer and its stockholders, officers, directors, managers, employees, agents, representatives, and controlling Persons.
“ Buyer Indemnified Parties Ceiling Amount ” has the meaning set forth in Section 8.5(a)(i) .
“ Buyer Indemnified Parties Threshold Amount ” has the meaning set forth in Section 8.5(a)(ii) .
“ Cash ” means cash and cash equivalents (including marketable securities and short term investments) calculated in accordance with GAAP applied on a basis consistent with the preparation of the Financial Statements.
“ Closing ” has the meaning set forth in Section 2.4 .
“ Closing Date ” has the meaning set forth in Section 2.4 .
2
“ Closing Statement ” means a statement prepared by Seller setting forth its computation of the Net Working Capital Adjustment.
“ Code ” means the Internal Revenue Code of 1986, as amended.
“ Commercially Reasonable Efforts ” means the efforts that a reasonable Person desirous of achieving a result would use in similar circumstances to ensure that such result is achieved as expeditiously and effectively as possible. Notwithstanding the foregoing, an obligation to use Commercially Reasonable Efforts under this Agreement does not require the Person subject to that obligation to make any payments or pay other consideration in excess of $2,500 to any third party from whom Consent is required to be obtained hereunder in exchange for receipt of such Consent, nor does it require any Person to take any actions that would cause a termination of this Agreement pursuant to ARTICLE 9 or a condition reportable pursuant to Section 5.5 .
“ Commitment ” means (a) options, warrants, convertible securities, exchangeable securities, subscription rights, conversion rights, exchange rights, or other Contracts that require a Person to issue any of its Equity Interests; (b) any other securities convertible into, exchangeable or exercisable for, or representing the right to subscribe for any Equity Interest of a Person; (c) statutory pre-emptive rights or pre-emptive rights granted under a Person’s Organizational Documents; and (d) stock appreciation rights, phantom stock, profit participation, or other similar rights with respect to a Person.
“ Company ” has the meaning set forth in the recitals to this Agreement.
“
Confidential Information
” means any information concerning the businesses and affairs of any of the Acquired Entities that is
“ Consent ” means any consent, approval, waiver, or other similar action.
“ Contract ” means any contract, agreement, or commitment, whether written or oral.
“ Copyrights ” means all copyrights in both published works and unpublished works.
“ Damages ” means all damages, losses (including any diminution in value and loss of any available Tax deduction), Liabilities, payments, amounts paid in settlement, obligations, fines, penalties, expenses, costs associated with obtaining injunctive relief, and other costs, including reasonable fees and expenses of attorneys, accountants and other professional advisors, and of expert witnesses and other out-of-pocket costs of investigation, preparation, and litigation in connection with any Action or threatened Action.
3
“ Employee Agreement ” means each management, employment, severance, or similar Contract between any Acquired Entity and any officer or other employee providing services thereto pursuant to which any Acquired Entity has or may have any Liability.
“ Employee Benefit Plan ” means each plan, program, policy, payroll practice, contract, agreement (including Employee Agreements), or other arrangement providing for compensation, severance, termination pay, performance awards, stock or stock-related awards, fringe benefits, or other employee benefits of any kind, whether formal or informal, funded or unfunded, written or oral, including each “employee benefit plan,” within the meaning of Section 3(3) of ERISA and each “Multi-employer Plan” within the meaning of Sections 3(37) or 4001(a)(3) of ERISA.
“ Employee Pension Benefit Plan ” has the meaning set forth in ERISA Section 3(2).
“ Employee Welfare Benefit Plan ” has the meaning set forth in ERISA Section 3(1).
“ Encumbrance ” means any Order, Security Interest, right of first refusal, or restriction on voting, transfer, or receipt of income, other than restrictions under federal and state securities laws and regulations.
“ Environmental, Health, and Safety Requirements ” means all Orders and Laws concerning or relating to public health and safety, worker/occupational health and safety, and pollution or protection of the environment, including those relating to the presence, use, manufacturing, refining, production, generation, handling, transportation, treatment, recycling, transfer, storage, disposal, distribution, importing, labeling, testing, processing, discharge, release, threatened release, control or other action or failure to act involving cleanup of any hazardous materials, substances, or wastes, as such requirements are enacted and in effect on or prior to the Closing Date.
“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended.
“ ERISA Affiliate ” means each business or entity that is a member of a “controlled group of corporations,” under “common control” or an “affiliated service group” with any Acquired Entity within the meaning of Sections 414(b), (c) or (m) of the Code, or required to be aggregated with any Acquired Entity under Section 414(o) of the Code, or is under “common control” with any Acquired Entity, within the meaning of Section 4001(a)(14) of ERISA.
“ Equity Interest ” means (a) with respect to a corporation, any and all shares of capital stock and any Commitments with respect thereto, (b) with respect to a partnership, limited liability company, trust, or similar Person, any and all units, interests, or other partnership/limited liability company interests, and any Commitments with respect thereto, and (c) any other direct or indirect equity ownership or participation in a Person.
4
“ Expiration Date ” means December 31, 2006.
“ Fiduciary ” is defined in ERISA Section 3(21).
“ Financial Statements ” has the meaning set forth in Section 4.8 .
“ Franchise Agreement ” has the meaning set forth in Section 4.13(a) .
“ Franchise Offering Circular” means the Franchise Offering Circular, dated as of May 18, 2006, and any prior franchise offering circular for the Company.
“ Franchisee ” has the meaning set forth in Section 4.13(a) .
“ Franchise Sales Person ” has the meaning set forth in Section 4.13(k) .
“ Funded Indebtedness ” means all (a) indebtedness of any Acquired Entity for borrowed money or other interest-bearing indebtedness, (b) obligations of any Acquired Entity to pay the deferred purchase or acquisition price for goods or services or businesses acquired by any Acquired Entity which are accrued or required to be accrued under GAAP, applied on a consistent basis, other than trade accounts payable or accrued expenses in the ordinary course of business on no more than ninety (90) day payment terms, (c) indebtedness of others guaranteed by any Acquired Entity or secured by a Security Interest on any Acquired Entity’s assets, (d) any long-term liabilities of an Acquired Entity other than accrued rent escalation and deferred rent under real estate leases, and (e) any receivables or loans owed by an Acquired Entity to the Seller or its Affiliates that are not eliminated prior to Closing.
“ GAAP ” means United States generally accepted accounting principles as in effect from time to time, consistently applied.
“ Governmental Body ” means any legislature, agency, bureau, branch, department, division, commission, court, tribunal, magistrate, justice, quasi-governmental body, or other similar recognized organization or body of any federal, state, county, municipal, or local government or other similar recognized organization or body exercising similar powers or authority.
“ Income Tax ” means any federal, state, local, or foreign income tax measured by or imposed on net income, including any interest, penalty, or addition thereto, whether disputed or not.
5
“ Income Tax Return ” means any return, declaration, report, claim for refund, or information return or statement relating to Income Taxes, including any schedule or attachment thereto.
“ Indemnification Claim ” has the meaning set forth in Section 8.4(a) .
“ Indemnified Parties ” means, individually and as a group, the Seller Indemnified Parties and the Buyer Indemnified Parties.
“ Indemnitor ” means any Party having any Liability to any Indemnified Party under this Agreement.
“ Intellectual Property ” means any rights, licenses, and other claims that any Person may have to claim ownership, authorship, or invention, or the right to use, to object to or prevent the modification of, to withdraw from circulation, or to control the publication or distribution of, any Marks, Patents, Copyrights, or trade secrets.
“ Interim Financial Statements ” has the meaning set forth in Section 4.8 .
“ Knowledge ” means the actual knowledge of a Person’s officers and directors as of the date of this Agreement and the Closing Date. With respect to particular areas of interest, “Knowledge” includes the knowledge of such Person’s employees charged with responsibility for a particular functional or regional area of such Person’s operations ( e.g. , an employee directing the environmental section with respect to knowledge of environmental matters or a regional manager).
“ Law ” means any law (statutory, common, or otherwise), constitution, treaty, convention, ordinance, equitable principle, code, rule, regulation, executive order, request, or other similar authority enacted, adopted, promulgated, or applied by any Governmental Body, each as amended.
“ Liability ” or “ Liable ” means any liability or monetary obligation, whether absolute or contingent, matured or unmatured, conditional or unconditional, accrued or unaccrued, liquidated or unliquidated, or due or to become due.
“ Marks ” means all fictitious business names, trading names, corporate names, and registered trademarks, and service marks and applications therefor.
“ Material Adverse Change (or Effect) ” means any change (or effect) that is materially adverse to the business, operations, condition (financial or otherwise), results of operations,
6
assets, or liabilities of the Acquired Entities taken as a whole; provided , however , that a Material Adverse Change (or Effect) will not include any adverse change or effect (a) resulting from any change in general economic, financial, or market conditions, including, without limitation, any change in general economic, financial, or market conditions due to any act of war, terrorism, or threat, (b) that negatively affects the restaurant, food, or beverage industries generally, (c) resulting from any actions taken required under this Agreement to obtain any approval or authorization under any Law, (d) resulting from changes in applicable Laws or the interpretation thereof after the date hereof, (e) resulting from changes in accounting requirements or principles or the interpretation thereof after the date hereof, or (f) resulting directly from any existing event, occurrence, circumstance, or trend with respect to which Buyer has Knowledge as of the date of this Agreement.
“ Multi-employer Plan ” has the meaning set forth in ERISA Section 3(37).
“ Net Working Capital ” means the excess of the Company’s total current assets (excluding Tax prepayments) over total current liabilities (excluding Taxes and including any long term indebtedness, if any, incurred after the Balance Sheet Date), as of the Closing Date, calculated on a basis consistent with the preparation of the Financial Statements.
“ Net Working Capital Adjustment ” has the meaning set forth in Section 2.3(a) .
“ Order ” means any order, ruling, decision, verdict, decree, writ, subpoena, award, judgment, injunction, or other similar determination or finding by, before, or under the supervision of any Governmental Body, or arbitrator.
“ Ordinary Course of Business ” means the ordinary course of business consistent with past custom and practice (including with respect to quantity and frequency).
“ Organizational Documents ” means the articles of incorporation, certificate of incorporation, charter, bylaws, articles of formation, regulations, operating agreement, certificate of limited partnership, partnership agreement, and all other similar documents, instruments, or certificates executed, adopted, or filed in connection with the creation, formation, or organization of a Person, including any amendments thereto.
“ Party ” has the meaning set forth in the introductory paragraph of this Agreement.
“ Patents ” means all patents and patent applications.
“ PBGC ” means the Pension Benefit Guaranty Corporation.
7
“ Permit ” means any permit, license, certificate, approval, consent, waiver, accreditation, or other similar authorization required by any Law or Governmental Body.
“ Permitted Encumbrances ” means (a) liens for Taxes, assessments, governmental charges or levies or mechanics’ and other statutory liens that are not yet delinquent or can be paid without penalty or are being contested in good faith and by appropriate proceedings in respect thereof and for which an appropriate reserve has been established in accordance with GAAP, (b) imperfections of title and exceptions to title that are immaterial in amount relative to the property affected and that do not materially interfere with the present or intended use of the property subject thereto or affected thereby, and (c) restrictions on transfer generally arising under federal and state securities laws.
“ Person ” means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, any other business entity or a Governmental Body.
“ Pre-Closing Tax Period ” means the period commencing with the first day of a Straddle Period and ending as of the close of business on the day preceding the Closing Date.
“ Post-Closing Tax Period ” means the period commencing on the first day after the Closing Date and ending on the last day of a Straddle Period.
“ Prohibited Transactions ” is defined in ERISA Section 406 and Code Section 4975.
“ Purchase Price ” has the meaning set forth in Section 2.2 .
“ Regulation ” or “ Reg. ” means a regulation promulgated by the U.S. Treasury Department under the Code.
“ Schedules ” means the Schedules to this Agreement.
“ SEC ” means the U.S. Securities and Exchange Commission.
“ Securities Act ” means the Securities Act of 1933, as amended.
“ Security Interest ” means any security interest, deed of trust, mortgage, pledge, lien, charge, claim, or other similar interest or right, except for (a) liens for Taxes, assessments, governmental charges, or claims not then due and payable that are being contested in good faith;
8
(b) statutory liens of landlords and warehousemen’s, carriers’, mechanics’, suppliers’, materialmen’s, repairmen’s, or other like liens (including Contractual landlords’ liens) arising in the Ordinary Course of Business; and (c) liens incurred or deposits made in the Ordinary Course of Business in connection with workers’ compensation, unemployment insurance and other similar types of social security.
“ Seller ” has the meaning set forth in the introductory paragraph of this Agreement.
“ Seller Indemnified Parties ” means Seller and its officers, directors, managers, employees, agents representatives, controlling Persons, and stockholders.
“ Seller Indemnified Parties Ceiling Amount ” has the meaning set forth in Section 8.5(b)(i) .
“ Seller Indemnified Parties Threshold Amount ” has the meaning set forth in Section 8.5(b)(ii) .
“ Shares ” means all of the issued and outstanding shares of common stock, without par value, of the Company.
“ Straddle Period ” has the meaning set forth in Section 6.2(f) .
“ Subsidiary ” means, with respect to any Person: (a) any corporation of which more than 50% of the total voting power of all classes of the Equity Interests entitled (without regard to the occurrence of any contingency) to vote in the election of directors is owned by such Person directly or through one or more other Subsidiaries of such Person; and (b) any Person other than a corporation of which at least a majority of the Equity Interests (however designated) entitled (without regard to the occurrence of any contingency) to vote in the election of the governing body, partners, managers, or others that will control the management of such entity is owned by such Person directly or through one or more other Subsidiaries of such Person.
“ Tax ” means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs, ad valorem, duties, capital stock, franchise, profits, withholding, social security, Medicare, unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto.
“ Tax Return ” means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof.
9
“ Termination Date ” means the earlier to occur of (a) the Expiration Date and (b) the date on which this Agreement is terminated pursuant to Section 9.1 (other than Section 9.1(b) ).
“ Territorial Rights ” has the meaning set forth in Section 4.13(m) .
“ Transactions ” means (a) the sale of the Shares by Seller to Buyer and Buyer’s delivery of the Purchase Price therefor; (b) the execution, delivery, and performance of all of the documents, instruments, and agreements to be executed, delivered, and performed in connection herewith; and (c) the performance by Buyer and Seller of their respective covenants and obligations under this Agreement.
“ Transaction Documents ” means collectively, this Agreement and all exhibits, schedules or other documents entered into or delivered pursuant thereto.
“ WARN Act ” has the meaning set forth in Section 4.17 .
ARTICLE 2. PURCHASE AND SALE OF SHARES
2.1 Basic Transaction.
On and subject to the terms and conditions of this Agreement, Buyer agrees to purchase from Seller, and Seller agrees to sell to Buyer, all of the Shares for the Purchase Price.
2.2 Purchase Price.
Buyer agrees to pay to Seller at the Closing $31,000,000 (the “ Purchase Price ”) by wire transfer of immediately available funds, subject to adjustment as provided in Section 2.3 .
2.3 Purchase Price Adjustment.
(a) Adjustment. The Purchase Price will be adjusted as follows (the “Net Working Capital Adjustment” ):
(i) If the Net Working Capital of the Company on the Closing Date, as set forth on the Closing Statement delivered pursuant to Section 2.3(b) , is positive, the Purchase Price will be increased on a dollar-for-dollar basis in an amount equal to such excess.
(ii) If the Net Working Capital of the Company on the Closing Date, as set forth on the Closing Statement delivered pursuant to Section 2.3(b) , is negative, the Purchase Price will be decreased on a dollar-for-dollar basis in an
10
amount equal to such shortfall.
(b) Closing Statement. Within 10 days after the Closing Date, Seller shall deliver to Buyer a Closing Statement setting forth Seller’s computation of the Purchase Price as of the Closing Date, adjusted for the Net Working Capital Adjustment. Such Closing Statement shall be subject to Buyer’s review as follows:
(i) During the period ending on the later of (x) 30 days following the date Seller delivers a Closing Statement and (y) December 31, 2006, Buyer will advise Seller whether it has any exceptions to the Closing Statement by delivering its own computation of the Closing Statement (the “ Buyer Closing Statement ”). Buyer will have the right to discuss the Closing Statement with Seller and to request copies of supporting documentation. Unless Buyer delivers to Seller within such period a Buyer Closing Statement, the Closing Statement will be conclusive and binding. If Buyer timely submits the Buyer Closing Statement herein, then (x) for 20 days after the date Seller receives such Buyer Closing Statement, Seller and Buyer shall in good faith seek to agree on a final and binding Closing Statement, and (y) lacking such agreement, the Closing Statement will be referred to KPMG LLP (or, if unwilling or unable to accept such engagement, such other independent national auditing firm that is mutually agreeable to Buyer and Seller) who will determine the final and binding Closing Statement within 30 days of such referral, which determination shall thereupon be conclusive and binding upon the Parties. The costs of such accountant shall be shared equally by Buyer and Seller.
(ii) Promptly (but not later than 5 days) after the establishment of the Closing Statement that is conclusive and binding:
(x) If the Purchase Price (as adjusted) exceeds the Purchase Price paid on the Closing Date, Buyer will pay to Seller such excess amount.
(y) If the Purchase Price paid by Buyer on the Closing Date exceeds the Purchase Price (as adjusted), Seller will pay to Buyer such excess amount.
(c) Interest on Adjustments. In the event Buyer or Seller fails to make any payment required by this Section 2.3 when due, interest will accrue on the unpaid amount at a rate per annum equal to the prime rate then in effect (as published from time to time by the Wall Street Journal) plus 2%, or, if less, the maximum rate of interest allowable by Law.
2.4 Closing.
The closing of the Transactions (the “ Closing ”) will take place at the offices of Akin Gump Strauss Hauer & Feld LLP, 1333 New Hampshire Avenue, Washington, DC 20036 commencing at 9:00 a.m. local time on the second business day following the satisfaction or
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waiver of all conditions to the obligations of the Parties to consummate the purchase and sale of the Shares (other than conditions with respect to actions the respective Parties will take at the Closing itself) or such other date as Buyer and Seller may mutually determine (the “ Closing Date ”).
2.5 Deliveries at Closing.
At the Closing,
(a) Seller shall deliver to Buyer an officer’s certificate, dated as of the Closing Date, substantially in the form of Exhibit A , duly executed on Seller’s behalf, as to whether each condition specified in Sections 7.1(a) - (c) has been satisfied in all respects;
(b) Seller shall deliver to Buyer a secretary’s certificate, dated as of the Closing Date, substantially in the form of Exhibit B , duly executed on Seller’s behalf;
(c) Buyer shall deliver to Seller an officer’s certificate, dated as of the Closing Date, substantially in the form of Exhibit C , duly executed on Buyer’s behalf, as to whether each condition specified in Sections 7.2(a) — (b) has been satisfied in all respects;
(d) Buyer shall deliver to Seller a secretary’s certificate, dated as of the Closing Date, substantially in the form of Exhibit D , duly executed on Buyer’s behalf;
(e) Buyer shall have received evidence of the resignations, effective as of the Closing, of each director and officer of the Acquired Entities set forth on Exhibit E except to the extent Buyer instructs otherwise;
(f) Seller shall deliver to Buyer stock certificates representing all of the Shares, duly endorsed or accompanied by duly executed stock powers;
(g) Buyer shall have received evidence neither the Shares nor substantially all the assets of any or all of the Acquired Entities are subject to any “blanket” financing statements; and
(h) Buyer shall deliver to Seller the Purchase Price in cash, via wire transfer of immediately available funds.
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ARTICLE 3. REPRESENTATIONS AND WARRANTIES CONCERNING TRANSACTION
3.1 Seller’s Representations and Warranties.
Seller represents and warrants to Buyer that the statements contained in this Section 3.1 are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing Date (as though made then and, except as expressly provided in a representation or warranty, as though the Closing Date were substituted for the date of this Agreement throughout this Section 3.1 ), except as set forth on the Schedules Seller has delivered to Buyer on the date of this Agreement.
(a) Organization of Seller. Seller is duly organized, validly existing, and in good standing under the Laws of the jurisdiction of its incorporation. There is no pending or, to Seller’s Knowledge, threatened, Action for the dissolution, liquidation, or insolvency of Seller.
(b) Authorization of Transaction. Seller has the relevant corporate power and authority necessary to execute and deliver each Transaction Document to which it is a party and to perform and consummate the Transactions. Seller has taken all action necessary to authorize the execution and delivery of each Transaction Document to which it is a party, the performance of its respective obligations thereunder, and the consummation of the Transactions. Each Transaction Document to which Seller is a party has been duly authorized, executed, and delivered by, and assuming the due authorization, execution and delivery thereof by Seller, is the legal, valid, and binding obligation of Seller, enforceable against Seller in accordance with its terms, except as such enforceability may be subject to the effects of bankruptcy, insolvency, reorganization, moratorium, or other Laws relating to or affecting the rights of creditors, and general principles of equity.
(c) Noncontravention. The execution and the delivery of this Agreement by Seller and the performance and consummation of the Transactions by Seller will not (i) Breach any Law or Order to which Seller is subject or any provision of the Organizational Documents of Seller; (ii) Breach any Contract or Permit to which Seller is a party or by which it is bound; or (iii) require any Consent, except any SEC and other filings required to be made by Seller.
(d) Brokers’ Fees. Seller has no Liability to pay any compensation to any broker, finder, or agent with respect to the Transactions for which Buyer could become Liable.
(e) Shares. Seller holds of record and owns beneficially 1,000 Shares, which are all the Shares of the Company, free and clear of any Encumbrances. Seller is not a party to any Contract that could require Seller to sell, transfer, or otherwise dispose of any capital stock of any Acquired Entity (other than this Agreement). Seller is not a party to any voting trust, proxy, or other agreement or understanding with respect to the voting of any capital stock of the
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Company.
3.2 Buyer’s Representations and Warranties.
Buyer represents and warrants to Seller that the statements contained in this Section 3.2 are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing Date (as though made then and, except as expressly provided in a representation or warranty, as though the Closing Date were substituted for the date of this Agreement throughout this Section 3.2 ).
(a) Organization of Buyer. Buyer is duly organized, validly existing, and in good standing under the Laws of the jurisdiction of its incorporation or formation. There is no pending or, to Buyer’s Knowledge, threatened, Action for the dissolution, liquidation, or insolvency of Buyer.
(b) Authorization of Transaction. Buyer has the relevant entity power and authority necessary to execute and deliver each Transaction Document to which it is a party and to perform and consummate the Transactions. Buyer has taken all action necessary to authorize the execution and delivery of each Transaction Document to which it is a party, the performance of its respective obligations thereunder, and the consummation of the Transactions. Each Transaction Document to which Buyer is a party has been duly authorized, executed, and delivered by, and assuming the due authorization, execution, and delivery thereof by Buyer, is the legal, valid, and binding obligation of Buyer, enforceable against Buyer in accordance with its terms, except as such enforceability may be subject to the effects of bankruptcy, insolvency, reorganization, moratorium, or other Laws relating to or affecting the rights of creditors, and general principles of equity.
(c) Noncontravention. Except as listed on Schedule 3.2(c) , the execution and the delivery of this Agreement by Buyer and the performance and consummation of the Transactions by Buyer will not (a) Breach any Law or Order to which Buyer is subject or any provision of the Organizational Documents of Buyer; (b) Breach any Contract or Permit to which Buyer is a party or by which it is bound or to which any of its assets is subject (or result in the imposition of any Encumbrance upon any of its assets); and (c) require any Consent, except any SEC and other filings required to be made by Buyer.
(d) Brokers’ Fees. Buyer has no Liability to pay any compensation to any broker, finder, or agent with respect to the Transactions for which Seller could become Liable.
(e) Securities Act. With respect to the Shares,
(i) Buyer is acquiring the Shares for its own account, not as a nominee or agent, for investment and not with a view to, or for resale in connection with,
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any distribution or public offering thereof within the meaning of the Securities Act. Buyer understands that the Shares have not been registered under the Securities Act by reason of a specific exemption therefrom, that the Shares must be held by Buyer indefinitely, and that Buyer must therefore bear the economic risk of such investment indefinitely, unless a subsequent disposition thereof is registered under the Securities Act or is exempt from such registration;
(ii) Buyer acknowledges that Buyer is able to fend for itself, can bear the economic risk of its investment and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Shares;
(iii) Buyer understands that the Shares are characterized as “restricted securities” under the federal securities laws inasmuch as they are being acquired from Seller in a transaction not involving a public offering and, that under such laws and applicable regulations, such securities may be resold without registration under the Securities Act in certain limited circumstances; and
(iv) Buyer was not formed for the specific purpose of acquiring the Shares.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES CONCERNING ACQUIRED ENTITIES
Seller represents and warrants to Buyer that the statements contained in this ARTICLE 4 are correct and complete as of the date of this Agreement and will be correct and complete as of the Closing Date (as though made then and, except as expressly provided in a representation or warranty, as though the Closing Date were substituted for the date of this Agreement throughout this ARTICLE 4 ), except as set forth on the Schedules Seller has delivered to Buyer on the date of this Agreement.
4.1 Organization and Qualification.
Each Acquired Entity is duly organized, validly existing, and in good standing under the laws of the jurisdiction of its formation. Each Acquired Entity is duly authorized to conduct business and is in good standing under the laws of each jurisdiction where such qualification is required. Each Acquired Entity has the relevant corporate or other entity power and authority to own or lease its properties and to carry on its businesses as currently conducted. Schedule 4.1 lists each Acquired Entity’s directors and officers. Seller has delivered to Buyer correct and complete copies of each Acquired Entity’s Organizational Documents, as amended to date. There is no pending, or to Seller’s Knowledge, threatened, Action for the dissolution, liquidation, or insolvency of any Acquired Entity.
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4.2 Capitalization.
The Company’s authorized Equity Interests consist of 1,000 Shares, all of which are issued and outstanding and all of which are owned by Seller. All of the issued and outstanding Shares: (a) have been duly authorized, are validly issued, fully paid, and non-assessable, (b) were issued in compliance with all applicable state and federal securities Laws, and (c) were not issued in Breach of any Commitments. The Company has no Commitments outstanding and has no obligation to issue any Commitments. No additional Commitments will arise in connection with the Transactions. There are no Contracts with respect to the voting or transfer of the Company’s Equity Interests. The Company is not obligated to redeem or otherwise acquire any of its outstanding Equity Interests. The Company is the owner, directly or indirectly, of all of the Equity Interests of each of the Acquired Subsidiaries.
4.3 Noncontravention.
Except as listed on Schedule 4.3 , the execution and the delivery of this Agreement by Seller and the performance and consummation of the Transactions by Seller will not (a) Breach any Law or Order to which each Acquired Entity is subject or any provision of the Organizational Documents of each Acquired Entity; (b) Breach any Contract or Permit to which each Acquired Entity is a party or by which it or its assets is bound; or (c) result in any Security Interests on the shares or assets of any Acquired Entity; or (d) require any Consent.
4.4 Records.
The copies of the Acquired Entities’ Organizational Documents that were provided to Buyer are accurate and complete and reflect all amendments made through the date of this Agreement. The Acquired Entities’ minute books and other records made available to Buyer for review were correct and complete as of the date of such review, no further entries have been made through the date of this Agreement, and such minute books and records contain an accurate record of all actions of the stockholders, directors, members, managers, or other such representatives of the Acquired Entities taken by written consent, at a meeting, or otherwise since formation.
4.5 Brokers’ Fees.
No Acquired Entity has any Liability to pay any compensation to any broker, finder, or agent with respect to the Transactions for which Buyer or any Acquired Entity could become Liable.
4.6 Title to and Condition of Assets; Restaurants.
(a) The Acquired Entities have good and marketable title to, or a valid
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leasehold interest in, all buildings, machinery, equipment, and other tangible assets located on their premises, shown on the Interim Financial Statements, or acquired after the Balance Sheet Date, which are necessary for the conduct of their business as currently conducted, in each case free and clear of all Encumbrances, except for properties and assets disposed of in the Ordinary Course of Business since the Balance Sheet Date and Encumbrances listed on Schedule 4.6(a) . Each such tangible asset has been maintained in the Ordinary Course of Business, is in good operating condition (subject to normal wear and tear), and is suitable for the purposes for which it is currently used.
(b) Since December 31, 2005, the Company has not acquired any restaurants or leases from franchisees. Since December 31, 2005, the Company has built or is in the process of building four restaurants and franchisees have built or are in the process of building two restaurants. As of the date of this Agreement, the Company owns and operates a total of 143 restaurants, and currently has a total of 154 restaurants operated by franchisees.
4.7 Acquired Subsidiaries.
Schedule 4.7 sets forth for each Acquired Subsidiary: (a) its name and jurisdiction of formation, (b) the number of authorized Equity Interests of each class of its Equity Interests, (c) the number of issued and outstanding Equity Interests of each class of its Equity Interests, the names of the holders thereof, and the number of Equity Interests held by each such holder, (d) the number of shares of its Equity Interests held in treasury, and (e) if such Acquired Subsidiary is not a corporation, (i) the class of Equity Interests created under such Acquired Subsidiary’s Organizational Documents and (ii) the holder(s) of such Equity Interests. All of the issued and outstanding Equity Interests of each Acquired Subsidiary (A) that is a corporation have been duly authorized and are validly issued, fully paid, and non-assessable and (B) that is not a corporation (x) have been duly created pursuant to the Laws of the jurisdiction of such Acquired Subsidiary and (y) have been issued and paid for in accordance with the Organizational Documents governing such Acquired Subsidiary. The Acquired Entities hold of record and own beneficially all of the outstanding Equity Interests of the Acquired Subsidiaries, free and clear of any Encumbrances. No Commitments exist or are authorized with respect to any Acquired Subsidiaries or their Equity Interests and no such Commitments will arise in connection with the Transactions. No Acquired Subsidiary is obligated to redeem or otherwise acquire any of its Equity Interests. Except as set forth on Schedule 4.7 , no Acquired Entity controls, directly or indirectly, or has any direct or indirect Equity Interest in any Person that is not an Acquired Subsidiary.
4.8 Financial Statements.
Set forth on Schedule 4.8 are the following financial statements (collectively the “ Financial Statements ”):
(a) unaudited consolidated balance sheets and statements of income, changes in stockholders’ equity, and cash flow as of and for the fiscal years ended January 2, 2006 and
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January 3, 2005 for the Acquired Entities; and
(b) unaudited consolidated balance sheets and statements of income, changes in stockholders’ equity, and cash flow (the “ Interim Financial Statements ”) as of and for the eight periods ended September 4, 2006 (the “ Balance Sheet Date ”) for the Acquired Entities.
The Financial Statements have been prepared in accordance with accounting principles applied on a consistent basis throughout the periods covered thereby and present fairly the financial condition of the Acquired Entities as of such dates and the results of operations of the Acquired Entities for such periods in accordance with GAAP; provided , however , that the Interim Financial Statements lack footnotes and other presentation items. As of the Balance Sheet Date, the Acquired Entities have no Funded Indebtedness.
The Company’s marketing development fund is in full compliance with the terms governing the collection and disbursement of such fund; the books and records of the Company pertaining to such fund are true, complete and accurate; and Seller has furnished Buyer with full access to such books and records.
4.9 Subsequent Events.
Except as set forth on Schedule 4.9 , since the Balance Sheet Date the Acquired Entities have operated in the Ordinary Course of Business and, as of the date of this Agreement, there have been no events, series of events or lack of occurrence thereof that, singularly or in the aggregate, have had a Material Adverse Effect. Without limiting the foregoing, except as set forth on Schedule 4.9 and Schedule 4.13(a)(iv) , since the Balance Sheet date, none of the following have occurred:
(a) No Acquired Entity has sold, leased, transferred, or assigned any assets in the Ordinary Course of Business and sales of assets have not exceeded $150,000 singularly or $300,000 in the aggregate.
(b) No Acquired Entity has entered into, terminated or modified any Contract (or series of related Contracts) either involving more than $200,000 or outside the Ordinary Course of Business.
(c) Other than the Permitted Encumbrances, no Encumbrance has been imposed upon any assets of any Acquired Entity.
(d) No Acquired Entity has made any capital expenditure (or series of related capital expenditures) involving more than $150,000 individually, $300,000 in the aggregate, or outside the Ordinary Course of Business.
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(e) No Acquired Entity has made any capital investment in, any loan to, or any acquisition of the securities or assets of, any other Person involving more than $150,000 individually, $300,000 in the aggregate, or outside the Ordinary Course of Business.
(f) No Acquired Entity has issued any note, bond, or other debt security or created, incurred, assumed, or guaranteed any liability for borrowed money or capitalized lease Contract either involving more than $100,000 individually or $200,000 in the aggregate.
(g) No Acquired Entity has delayed or postponed the payment of accounts payable or other Liabilities either involving more than $50,000 individually or $100,000 in the aggregate or outside the Ordinary Course of Business.
(h) No Acquired Entity has canceled, compromised, waived, or released any Action (or series of related Actions) either involving more than $150,000 or outside the Ordinary Course of Business.
(i) No Acquired Entity has granted any Contracts or any rights under or with respect to any Intellectual Property outside the Ordinary Course of Business.
(j) There has been no change made or authorized to be made to the Organizational Documents of any Acquired Entity.
(k) No Acquired Entity has issued, sold, or otherwise disposed of any of its Equity Interests.
(l) No Acquired Entity has declared, set aside, or paid any dividend or made any distribution with respect to its Equity Interests (whether in cash or in kind) or redeemed, purchased, or otherwise acquired any of its Equity Interests (other than dividends and other transactions solely among the Acquired Entities).
(m) No Acquired Entity has experienced any damage, destruction, or loss (whether or not covered by insurance) to its properties.
(n) No Acquired Entity has made any loan to, or entered into any other transaction with, any of its Affiliates, directors, officers, or employees.
(o) No Acquired Entity has entered into any employment, collective bargaining, or similar Contract or modified the terms of any existing such Contract.
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(p) No Acquired Entity has adopted, amended, modified, or terminated any bonus, profit-sharing, incentive, severance, or similar Contract for the benefit of any of its directors, officers, or employees (or taken any such action with respect to any other Employee Benefit Plan).
(q) No Acquired Entity has made or pledged to make any charitable or other capital contribution either involving more than $50,000 (individually or in the aggregate) or outside the Ordinary Course of Business.
(r) There has not been any other occurrence, event, incident, action, failure to act, or transaction with respect to the Acquired Entities either involving more than $150,000 individually or $300,000 in the aggregate or outside the Ordinary Course of Business.
(s) No Acquired Entity has granted any increase in the base compensation of any of its directors, officers or employees outside of the Ordinary Course of Business.
(t) No Acquired Entity has made any other material change in employment terms for any of its directors, officers, or employees outside of the Ordinary Course of Business.
(u) Excluding intercompany transactions permitted or required by Sections 5.8 and 5.10 , no Acquired Entity has discharged any material obligations or assets outside the Ordinary Course of Business, and no Acquired Entity has granted a waiver or consent with respect to a provision of any Franchise Agreement regarding a counter-party’s obligation to make payments of royalty fees, contributions to any marketing fund or expenditures for advertising purposes.
(v) No Acquired Entity has committed to any of the foregoing.
Notwithstanding anything to the contrary set forth in this Agreement, the Company shall not be required, and shall not be in Breach of this Section 4.9 for failure, to schedule any of the matters described in this Agreement that are outside the Ordinary Course of Business if the aggregate of all such occurrences, events, incidents, actions, failures to act, or other transactions with respect to the Acquired Entities aggregate $500,000 or less.
4.10 Legal Compliance.
Each Acquired Entity has complied with all applicable Laws, and no Action is pending or, to the Seller’s Knowledge, threatened against such Acquired Entity alleging any such failure to comply, except where the failure to comply would not have a Material Adverse Effect. No expenditures outside the Ordinary Course of Business are, or based on applicable Law, will be required of any Acquired Entity for it and its business and operations to remain in compliance
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with applicable Law. Notwithstanding the foregoing, no representation or warranty is made in this Section 4.10 with respect to (a) Environmental, Health, and Safety Requirements, which are covered exclusively in Section 4.19 or (b) franchise matters, which are covered exclusively in Section 4.13 .
4.11 Tax Matters.
Except as set forth on Schedule 4.11 ,
(a) all Income Tax Returns and all other material Tax Returns that are required to be filed by or with respect to each Acquired Entity, either separately or as part of a consolidated, combined, or unitary group, have been timely filed, or where not so filed, are covered under an extension that has been obtained therefor;
(b) all such Tax Returns were complete (i) in all respects in so far as they relate to the Acquired Entities and (ii) in all material respects in so far as they relate to members of the Affiliated Group other than the Acquired Entities;
(c) all Taxes due and payable by the Acquired Entities have been paid in full, and all material Income Taxes owed by the Affiliated Group of which Seller is the parent have been paid (or, if not paid, have been sufficiently reserved for on the books of the Affiliated Group) for each taxable period during which any of the Acquired Entities was a member of such Affiliated Group;
(d) no waivers of statutes of limitations or extensions of time to assess have been given by or requested with respect to any Taxes of the Acquired Entities or of any material Income Taxes of any Affiliated Group of which the Acquired Entities are a member;
(e) no claim or assessment has been initiated, or to Seller’s Knowledge, threatened by any taxing authority against any of the Acquired Entities, or against Seller or its Affiliated Group for any taxable period during which the Acquired Entities were members of such group;
(f) each of the Acquired Entities has withheld and timely paid to the appropriate taxing authority the required amounts in compliance with all tax withholding provisions of Law;
(g) none of the Acquired Entities has been a member of an Affiliated Group filing a consolidated federal Income Tax Return other than a group the common parent of which is Seller or one of the Acquired Entities;
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(h) none of the Acquired Entities has any liability for the Taxes of any Person other than such Acquired Entities (i) under Reg. §1.1502-6 (or any similar provision of state, local, or foreign law), (ii) as a transferee or successor, (iii) by Contract, or (iv) otherwise;
(i) none of the Acquired Entities will be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing Date as a result of any:
(i) change in method of accounting for a taxable period ending on or prior to the Closing Date;
(ii) “closing agreement” as described in Code Section 7121 (or any corresponding or similar provision of state, local or foreign income Tax law) executed on or prior to the Closing Date;
(iii) intercompany transactions or any excess loss account described in Treasury Regulations under Code Section 1502 (or any corresponding or similar provision of state, local or foreign income Tax law);
(iv) installment sale or open transaction disposition made on or prior to the Closing Date; or
(v) prepaid amount received on or prior to the Closing Date.
(j) Schedule 4.11 lists all returns filed with respect to each Acquired Entity for income, franchise, sales and use, payroll, or personal property taxes for taxable periods ended on or after December 31, 2003, indicates those returns for such taxes that have been audited, and indicates those returns for such taxes that currently are the subject of audit, or for which any Acquired Entity has received any (i) notice indicating an intent to open an audit or other review, (ii) request for information related to tax matters, or (iii) notice of deficiency or proposed adjustment for any amount of tax proposed, asserted, or assessed by any taxing authority against any Acquired Entity. Seller has delivered to Buyer correct and complete copies of the stacked federal Income Tax Returns prepared for the Acquired Entities in conjunction with preparing the consolidated federal Income Tax Returns for the Affiliated Group, examination reports, and statements of deficiencies assessed against or agreed to by and relating to the Tax liability attributable to any Acquired Entity on or after December 31, 2003.
4.12 Real Property.
(a) No Acquired Entity owns any real property.
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(b) Schedule 4.12(b) lists and describes briefly all real property leased or subleased to each Acquired Entity and any leases or subleases made by any Acquired Entity. Seller has made available to Buyer correct and complete copies of the lease and sublease Contracts (as amended to date) listed on Schedule 4.12(b) . Except as set forth on Schedule 4.12(b) , with respect to each lease and sublease Contract required to be listed on such schedule:
(i) such Contract is the legal, valid, and binding obligation of the Acquired Entity, enforceable against such Person in accordance with its terms, except as such enforceability may be subject to the effects of bankruptcy, insolvency, reorganization, moratorium, or other Laws relating to or affecting the rights of creditors, and general principles of equity, and will continue to be such following the Closing;
(ii) no Acquired Entity is in Breach of such Contract and no Breach of such Contract shall result from the consummation of the transactions contemplated hereby;
(iii) no party to the Contract has delivered a written demand for early termination thereof;
(iv) there are no Actions or Orders in effect as to the Contract;
(v) no Acquired Entity has granted or suffered to exist any Security Interest in the leasehold or subleasehold Contract;
(vi) all facilities leased or subleased under the Contract have been operated and maintained in accordance with applicable Laws; and
(vii) all facilities leased or subleased under the Contract are supplied in the Ordinary Course of Business.
4.13 Franchise Matters.
(a) Schedule 4.13(a) accurately identifies all franchise agreements and area development agreements to which any Acquired Entity is a party (collectively, “ Franchise Agreements ”) that are currently in effect, by name of franchisee, licensee or area developer (“ Franchisee ”), date of agreement, and location of restaurant(s) or development area, and no other Contracts exist between any Acquired Entity and any third party granting any such third party the right, or any option or right of first refusal, to conduct business under the name “Baja Fresh” or any other Marks owned or used by any Acquired Entity. The consummation of the Transactions will not require the consent of any Franchisee. Except as set forth on Schedule 4.13(a) , to Seller’s Knowledge, the restaurants that are the subject of Franchise Agreements with
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Franchisees are presently open to the public and operating. Seller has made available to Buyer a correct and complete copy of each Franchise Agreement (as amended to date) listed on Schedule 4.13(a) . With respect to each such Franchise Agreement:
(i) such Franchise Agreement is the legal, valid, and binding obligation of the applicable Acquired Entity, enforceable against such Person in accordance with its terms, except as such enforceability may be subject to (x) the effects of bankruptcy, insolvency, reorganization, moratorium, or other Laws relating to or affecting the rights of creditors, and general principles of equity; (y) the effects of franchise Laws (and judicial decisions interpreting such franchise Laws) and other Laws of general applicability including those relating to covenants not to compete and public policy considerations; and (z) the qualification that certain provisions of the Franchise Agreement may not be enforceable in whole or in part, but such provisions do not render such Franchise Agreement invalid as a whole and such Franchise Agreement contains adequate provisions for enforcing the performance by the Franchisee of its obligations thereunder and for the practical realization of the rights and benefits afforded each Acquired Entity thereby, except for the economic consequences resulting from, and delay imposed by, or any procedure required by, applicable federal or state laws, rules, regulations and court decisions;
(ii) except as set forth on Schedule 4.13(a)(ii) , no Acquired Entity nor, to Seller’s Knowledge, any counter-party is in Breach of such Franchise Agreement, and to Seller’s Knowledge no event has occurred that with notice or lapse of time would constitute a Breach under the Franchise Agreement;
(iii) except as set forth on Schedule 4.13(a)(iii) , no party to such Franchise Agreement has delivered a formal written demand for early termination pursuant to the terms thereof since June 19, 2002; and
(iv) except as set forth on Schedule 4.13(a)(iv) , no Acquired Entity has granted a waiver or consent with respect to a provision of such Franchise Agreement regarding a counter-party’s obligation to make payments of royalty fees, contributions to any marketing development fund, or expenditures for advertising purposes; and
(v) the Company has in its possession an original executed copy of each Franchise Agreement. Except as set forth on Schedule 4.13(a)(v) , there are no written amendments to the Franchise Agreements or other agreements between any Acquired Entity and the Franchisees reflecting the understandings between any Acquired Entity and the Franchisees under the Franchise Agreements which have not heretofore been delivered to the Buyer by the Company. Except as set forth on Schedule 4.13(a)(v) , there are no oral amendments to the Franchise
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Agreements or other agreements between the Acquired Entities and the Franchisees which have not been memorialized in a written instrument and expressly agreed to by the Acquired Entities and the Franchisees.
(b) Except as set forth on Schedule 4.13(b) , to Seller’s Knowledge each Franchisee is current in its financial obligations to each Acquired Entity, including without limitation, for payments due for franchise, development, or license fees, royalties, advertising contributions, and product purchases.
(c) Except as set forth on Schedule 4.13(c) , to Seller’s Knowledge each Franchisee is current in its development obligations with respect to each restaurant to be developed by such Franchisee in such Franchisee’s development area.
(d) Except as set forth on Schedule 4.13(d) , to Seller’s Knowledge, since June 1, 2005, no Acquired Entity has received any formal written notice, claim or demand pursuant to the terms of a Franchise Agreement from any Franchisee of any Breach by any Acquired Entity of any material term or provision of such Franchise Agreement and, to Seller’s Knowledge, no Acquired Entity is in Breach of any material term or provision of the Franchise Agreements as of the date of this Agreement.
(e) Except as set forth on Schedule 4.13(e) , to Seller’s Knowledge there are no asserted Breaches of any of the Franchise Agreements by any Acquired Entity that were the subject of a formal written notice, claim or demand from a Franchisee pursuant to the terms of such Franchise Agreement that remain uncured and otherwise unresolved. Except as set forth on Schedule 4.13(e) , since June 1, 2005 there has been no formal written demand by any Franchisee pursuant to the terms of a Franchise Agreement for rescission of such Franchise Agreement.
(f) Schedule 4.13(f) sets forth each state or other jurisdiction in which any Acquired Entity is currently registered to sell its franchises or with which any Acquired Entity has filed an application for registration to sell its franchises that is currently pending as of the date of this Agreement, or has filed (where such filing is required) an application for exemption from registration, to sell franchises, and the effective date and expiration date of each such registration and exemption.
(g) Schedule 4.13(g) sets forth each state or other jurisdiction in which any Acquired Entity has filed, or caused to be filed, applications for registration of the sale of the Company’s franchises and/or applications or notices of exemption from such registration during the period commencing on June 19, 2002 and continuing through the date of this Agreement.
(h) To Seller’s Knowledge, other than matters for which the Acquired Entities have obtained releases, during the period commencing on June 19, 2002 and continuing through the date of this Agreement, the Company has in all material respects made all disclosures in its
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Franchise Offering Circular required by all applicable federal and state laws and regulations which govern the sale of franchises, and neither an Acquired Entity nor any “Franchise Sales Person” (as defined in Section 4.13(l) herein) has offered for sale, accepted an offer, or sold a Franchise except in compliance with all applicable federal and state laws and regulations which govern the sale of franchises.
(i) Except as disclosed in any Franchise Offering Circular, during the period commencing on June 19, 2002 and continuing through the date of this Agreement, the Company has received no written notice of any violation by any Acquired Entity of any franchise law from any federal, Canadian or state regulatory agency and, to Seller’s Knowledge, no allegations of violations by any Acquired Entity of any state franchise registration, disclosure, relationship or termination law have been made by any federal, Canadian or state regulatory agency.
(j) Except as disclosed in any Franchise Offering Circular, to Seller’s Knowledge, no director, general partner, officer or other executive of an Acquired Entity that has offered or sold franchises, and who has had management responsibilities relating to the Franchisees offered by such Acquired Entity, has, since June 19, 2002:
(i) had any administrative, criminal or material civil action pending against that person alleging a violation of a franchise, antitrust or securities law, fraud, unfair or deceptive practices or comparable allegations.
(ii) been subject to any currently effective order of any national securities association or national securities exchange, as defined in the Securities and Exchange Act of 1934, 15 U.S.C.A. 78a et seq. , suspending or expelling such person from membership in such association or exchange;
(iii) been convicted of a felony or pleaded nolo contendere to a felony charge; or been held liable in a civil action by final judgment or been the subject of a material action involving violation of a franchise, antitrust or securities law, fraud, unfair or deceptive practices or comparable allegations; and
(iv) been subject to a currently effective injunctive or restrictive order or decree relating to the franchise offered by the applicable Acquired Entity, or under a federal, state or Canadian franchise, securities, antitrust, trade regulation or trade practice law resulting from a concluded or pending action or proceeding brought by a public agency.
(k) Except as disclosed in any Franchise Offering Circular, to Seller’s Knowledge, no officer or general partner of an Acquired Entity that has offered or sold franchises has, since June 19, 2002:
(i) has filed as a debtor (or had filed against it) a petition to start an action under the U.S. Bankruptcy Code;
(ii) has obtained a discharge of its debts under the U.S. Bankruptcy Code; and
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(iii) except as otherwise provided in Schedule 4.13(k)(iii) , was a principal officer of a company or a general partner of a partnership that either filed as a debtor (or had filed against it) a petition to start an action under the U.S. Bankruptcy Code or that obtained a discharge of its debts under the U.S. Bankruptcy Code during or within one year after the officer or general partner of such Acquired Entity held this position in the company or partnership.
(l) Schedule 4.13(l) sets forth a complete and accurate list of all independent sales representatives, area developers, agents, employees, contractors, brokers or consultants authorized by the Company to offer or sell franchises during the period commencing on June 19, 2002 and continuing through the date of this Agreement (collectively, “ Franchise Sales Persons ”). Schedule 4.13(l) is a complete and correct list of all written or oral agreements or arrangements (and with respect to oral agreements a description thereof) with such Franchise Sales Persons under which an Acquired Entity has authorized any Franchise Sales Persons to offer or sell Franchises on behalf of an Acquired Entity or agreed to rebate or share amounts receivable under any Franchise Agreement and indicating which of such agreements are in default and may be terminated by an Acquired Entity by notice to the other party. Seller has delivered to Buyer true, complete and correct copies of all written agreements described in Schedule 4.13(l) . Seller has delivered to Buyer complete and correct copies of all written correspondence and memoranda evidencing such oral agreements described in Schedule 4.13(l) .
(m) Except as disclosed in any Franchise Offering Circular, during the period commencing on June 19, 2002 and continuing through the date of this Agreement, to Seller’s Knowledge, except as disclosed in the applicable Franchise Offering Circular used during such period, no Franchise Sales Person:
(i) has had any administrative, criminal or material civil action pending against that person alleging a violation of a franchise, antitrust or securities law, fraud, unfair or deceptive practices or comparable allegations;
(ii) has been subject to any currently effective order of any national securities association or national securities exchange, as defined in the Securities and Exchange Act of 1934, 15 U.S.C.A. 78a et seq. , suspending or expelling such person from membership in such association or exchange;
(iii) has been convicted of a felony or pleaded nolo contendere to a felony charge; or been held liable in a civil action by final judgment or been the subject of a material action involving violation of a franchise, antitrust or securities law, fraud, unfair or deceptive practices or comparable allegations; and
(iv) has been subject to a currently effective injunctive or restrictive order or decree relating to the franchise offered by the applicable Acquired Entity, or under a federal, state or Canadian franchise, securities, antitrust, trade regulation or trade practice law resulting from a concluded or pending action or proceeding brought by a public agency.
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(n) Except as set forth in the Franchise Agreements, no Franchisee has a protected territory, exclusive territory, covenant not to compete, right of first refusal, option or other arrangement (collectively, the “ Territorial Rights ”) with Acquired Entity pursuant to which (A) an Acquired Entity is restricted in any way in its right to own or operate, or license others to own or operate, any business or line of business; or (B) the Franchisee is granted rights for the acquisition of additional franchises or expansion of the Franchisee’s territory. No Franchisee’s Territorial Rights conflict with the Territorial Rights of any other Franchisee. To the extent an Acquired Entity granted any such Territorial Rights (whether disclosed or required to be disclosed herein), the Acquired Entity has complied with such Territorial Rights and, in the course of offering or selling franchises, the Acquired Entity has not violated the Territorial Rights of any Franchisee.
(o) Schedule 4.13(o) sets forth a complete and accurate list of the name, last known address and telephone number of all Franchisees whose franchise agreements were terminated, cancelled, not renewed, reacquired by the Company or who have otherwise ceased to do business during the period commencing on June 19, 2002 and continuing through the date of this Agreement.
(p) Schedule 4.13(p) sets forth a complete and accurate list of all Franchisees whose Franchise Agreements were transferred or sold to a new or existing Franchisee during the period commencing on June 19, 2002 and continuing through the date of this Agreement.
(q) Except as set forth on Schedule 4.13(q) , there are no sales by any Acquired Entity of Franchise Agreements which are pending or in progress as of the date of this Agreement.
(r) Except as set forth on Schedule 4.13(r) , to Seller’s Knowledge, there are no transfers of Franchise Agreements by any Franchisee which are pending or in progress as of the date of this Agreement.
(s) Except as set forth on Schedule 4.13(s) , and except in cases where delivery is otherwise evidenced in writing, the Company has in its possession an original executed copy of an Acknowledgment of Receipt from each Franchisee who received a Franchise Offering Circular from the Company during the period commencing on June 19, 2002 and continuing through the date of this Agreement.
(t) Except as set forth on Schedule 4.13(t) , there are no signed forbearance agreements, settlement agreements, general releases, cancellation agreements, termination agreements or purchase agreements for the reacquisition of restaurants between the Company and any of its Franchisees since June 1, 2005.
(u) Except as set forth on Schedule 4.13(u) , there are no arbitrations, mediations or civil actions pending between the Company and any of the Franchisees as of the date of this Agreement.
(v) Except as set forth on Schedule 4.13(v) , there have been no formal written notices of Breach or termination of any Franchise Agreement issued by the Company to any Franchisee pursuant to the terms of such Franchise Agreement since June 1, 2005 with respect to
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any material term or provision of any of the Franchise Agreements. Except as set forth on Schedule 4.13(v) , to Seller’s Knowledge there are no Breaches by any Franchisee of any Franchise Agreement which were the subject of a formal written notice of Breach issued by the Company pursuant to the terms of a Franchise Agreement that remain uncured and otherwise unresolved.
(w) Except as set forth on Schedule 4.13(w) , since June 19, 2002, there have been no consent orders or settlement agreements entered into by the Company with any federal, Canadian or state regulatory agency with respect to the sale of the Franchises.
(x) Except as set forth on Schedule 4.13(x) , since June 19, 2002, there have been no applications for material modifications to existing Franchise Agreements filed by the Company with any state regulatory agencies.
4.14 Intellectual Property.
(a) None of the Acquired Entities owns any Patents.
(b) Schedule 4.14(b) lists each Acquired Entity’s Marks, which Marks represent all Marks used by the Acquired Entities that are material to the operation of its business as currently conducted in the United States . All Marks required to be listed that have been registered with the United States Patent and Trademark Office or with a corresponding state office are currently in compliance with all formal legal requirements. Except as set forth on Schedule 4.14(b) , no Mark has been or is now involved in any opposition, invalidation, or cancellation and, to the Company’s Knowledge, no such Action is threatened with respect to any such Mark.
(c) No Acquired Entity has any registered Copyrights.
(d) Except as set forth on Schedule 4.14(d) , the Acquired Entities own or have the right to use all Intellectual Property necessary to operate in the United States the Acquired Entities’ businesses as currently conducted in the United States.
(e) Seller has made available to Buyer correct and complete copies of all written documentation evidencing ownership and prosecution (if applicable) of each item of any Acquired Entity’s Intellectual Property. With respect to each such item of Intellectual Property:
(i) except as set forth on Schedule 4.154(e) , an Acquired Entity possesses all right, title, and interest in and to the item, free and clear of any Encumbrance;
(ii) the item is not subject to any outstanding adverse Order;
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(iii) no Action is pending or, to Seller’s Knowledge, threatened which challenges the Enforceability, use, or ownership of the item; and
(iv) no Acquired Entity has ever agreed to indemnify any Person for or against any interference, infringement, misappropriation, or other conflict with respect to the item, except pursuant to indemnification provisions contained in such Acquired Entity’s standard Franchise Agreement.
(f) Except as set forth on Schedule 4.14(f) , no Acquired Entity has received any written notice alleging it has interfered with, infringed upon, misappropriated, or otherwise violated or come into conflict with any other Person’s Intellectual Property (including any claim that any Acquired Entity must license or refrain from using any other Person’s Intellectual Property). Except as set forth on Schedule 4.14(f) , to Seller’s Knowledge no third Person has any Intellectual Property that interferes or would be likely to interfere with any Acquired Entity’s use of any of its Intellectual Property.
4.15 Contracts.
Except as otherwise disclosed on Schedules 4.12(b) , 4.13(a) , 4.18(a) , and 4.21 , Schedule 4.15 lists the following Contracts to which any Acquired Entity is a party:
(a) Any Contract for the lease of personal property to or from any Person providing for lease payments in excess of $30,000 per annum.
(b) Any Contract for the purchase or sale of raw materials, commodities, supplies, products, or other personal property, or for the furnishing or receipt of services, the performance of which will extend over a period of more than one year, result in a loss to any Acquired Entity, or involve annual consideration in excess of $60,000.
(c) Any Contract concerning a limited liability company, partnership, joint venture, or similar arrangement.
(d) Any Contract under which any Acquired Entity has created, incurred, assumed, or guaranteed any Liability for borrowed money or any capitalized lease in excess of $30,000 per annum, or under which the Contract has imposed or the Acquired Entity has suffered to exist an Encumbrance on any of its assets.
(e) Any Contract restricting any Acquired Entity’s right to compete.
(f) Any profit sharing, stock option, stock purchase, stock appreciation,
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deferred compensation, severance, or other similar Contract for the benefit of its current or former directors, officers, and employees.
(g) Any collective bargaining Contract.
(h) Any Contract for the employment of any individual on a full-time, part-time, consulting, or other basis providing annual compensation in excess of $40,000 or providing severance benefits.
(i) Any Contract under which an Acquired Entity has advanced or loaned any amount to any of its directors or officers or, outside the Ordinary Course of Business, to its employees.
(j) Any Contract pursuant to which any Acquired Entity has granted to a third party rights under or with respect to any of its Intellectual Property.
(k) Any Contract pursuant to which any Acquired Entity has obtained from any third party rights under or with respect to any of its Intellectual Property.
(l) Any other Contract (or group of related Contracts) the performance of which involves receipt or payment of annual consideration in excess of $75,000.
The Company has made available to Buyer a correct and complete copy of each written Contract (as amended to date) listed on Schedule 4.15 and a written summary setting forth the terms and conditions of each oral Contract referred to on Schedule 4.15 . Each Contract listed on Schedule 4.15 is the legal, valid, and binding obligation of the Acquired Entity enforceable against such Person in accordance with its terms, except as such enforceability may be subject to the effects of bankruptcy, insolvency, reorganization, moratorium, or other Laws relating to or affecting the rights of creditors, and general principles of equity, and will continue to be so enforceable following the Closing.
4.16 Litigation.
Schedule 4.16 sets forth each instance in which any Acquired Entity (a) is subject to any outstanding Order or (b) is a party or, to the Company’s Knowledge, is threatened to be made a party to, to any Action.
4.17 Labor; Employees.
Except as set forth on Schedule 6.3(a) , to the Company’s Knowledge, no executive
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officer or group of employees has any plans to terminate employment with any Acquired Entity; provided , however , that, with respect to each executive officer of the Company, the determination of whether the Company has Knowledge of any such executive’s plans to terminate employment with any Acquired Entity will be made without reference to such executive’s Knowledge. No Acquired Entity is a party to or bound by any collective bargaining Contract, nor is there a labor strike, dispute, slowdown, or stoppage actually pending, or to the Knowledge of the Company, threatened against any Acquired Entity. No Action is pending or, to the Company’s Knowledge, threatened against any Acquired Entity alleging any unfair labor practice. Within the past 3 years, no Acquired Entity has implemented any plant closing or layoff of employees that could implicate the Worker Adjustment and Retraining Notification Act of 1988, as amended, or any similar foreign, state, or local law, regulation, or ordinance (collectively, the “ WARN Act ”). Except as listed in Schedule 4.17 , and except for obligations, if any, to at-will employees, each Acquired Entity is not a party to or obligated with respect to any (a) outstanding written or oral contracts with individuals who are current or former employees, agents, consultants, advisers, salesmen, sales representatives, distributors, sales agents, independent contractors, or representatives, or (b) collective bargaining agreements or contracts with any labor union or other representative of employees or any employee benefits provided for by any such agreement, correct and complete copies of which previously have been furnished to Buyer. Except as set forth on Schedule 4.17 , no allegation, charge or complaint of employment discrimination or other similar occurrence has occurred or is pending or to the Knowledge of the Seller threatened against any Acquired Entity nor does the Seller have Knowledge of any basis for any such allegation, charge, or complaint. The Acquired Entities have complied with all applicable Laws relating to the employment of labor, including provisions thereof relating to wages, hours, equal opportunity, collective bargaining, the Fair Labor Standards Act and the payment of social security and other taxes. There are no administrative charges or court complaints pending or to Seller’s Knowledge threatened against an Acquired Entity before the U.S. Equal Employment Opportunity Commission or any other Governmental Body concerning alleged employment discrimination or any other matters relating to the employment of labor, except for such matters as are referred to on Schedule 4.17 hereof.
4.18 Employee Benefits.
(a) Schedule 4.18(a) lists each Employee Benefit Plan that is now or previously has been sponsored, maintained, contributed to, or required to be contributed to, or with respect to which any withdrawal Liability (within the meaning of Section 4201 of ERISA) has been incurred for the benefit of employees of any Acquired Entity and any pension plan subject to Title IV of ERISA, pursuant to which any Acquired Entity has or may have any Liability.
(b) The Company has made available to Buyer correct and complete copies of all Employee Benefit Plans required to be listed on Schedule 4.18(a) and, if applicable, the plan Contracts and summary plan descriptions, the most recent determination letter received from the Internal Revenue Service and the most recent Form 5500 Annual Report.
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(c) Each such Employee Benefit Plan complies in form and in operation in all material respects with the applicable requirements of ERISA, the Code, other Laws, and its own terms.
(d) All required reports and descriptions (including Form 5500 Annual Reports, Summary Annual Reports, PBGC-l’s, and Summary Plan Descriptions) have been filed or distributed appropriately with respect to each such Employee Benefit Plan, if applicable. The requirements of Part 6 of Subtitle B of Title I of ERISA and of Code Section 4980B have been met with respect to each such Employee Benefit Plan that is an Employee Welfare Benefit Plan.
(e) All contributions (including all employer contributions and employee salary reduction contributions) that are due have been paid to each such Employee Benefit Plan that is an Employee Pension Benefit Plan and all contributions for any period ending on or before the Closing Date that are not yet due have been paid to each such Employee Pension Benefit Plan or accrued in the Ordinary Course of Business by the Acquired Entities. All premiums or other payments that are due for all periods ending on or before the Closing Date have been paid or accrued on the Financial Statements with respect to each such Employee Benefit Plan that is an Employee Welfare Benefit Plan.
(f) Each such Employee Pension Benefit Plan that is intended to satisfy the requirements of a “qualified plan” under Code Section 401(a) has received a favorable determination letter from the Internal Revenue Service or relies on a favorable opinion letter from the Internal Revenue Service issued to a prototype plan adopted by Seller.
(g) With respect to each Employee Benefit Plan that any Acquired Entity or any ERISA Affiliate sponsors or has ever sponsored, maintains, or ever has maintained or to which any of them contributes, has ever contributed, or has ever been required to contribute for the benefit of employees of any Acquired Entity:
(i) except as disclosed on Schedule 4.18(g)(i) , no such Employee Benefit Plan is subject to Title IV of ERISA;
(ii) there have been no Prohibited Transactions with respect to any such Employee Benefit Plan;
(iii) no Fiduciary has any Liability for Breach of fiduciary duty or any other failure to act or comply with the requirements of applicable Law in connection with the administration or investment of the assets of any such Employee Benefit Plan; and
(iv) no Action with respect to the administration or the investment of
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the assets of any such Employee Benefit Plan (other than routine claims for benefits) is pending or, to the Company’s Knowledge, threatened, and no Acquired Entity has incurred, and the Company has no reason to expect that any Acquired Entity will incur, any Liability to the PBGC (other than PBGC premium payments) or otherwise under Title IV of ERISA (including any withdrawal Liability) or under the Code with respect to any such Employee Benefit Plan that is an Employee Pension Benefit Plan.
(h) No Acquired Entity or any ERISA Affiliate contributes to, ever has contributed to, or ever has been required to contribute to any Multi-employer Plan or has any Liability (including withdrawal Liability) under any Multi-employer Plan.
(i) Except as set forth on Schedule 4.18(i) , no Acquired Entity or any ERISA Affiliate (i) maintains or contributes to any Employee Benefit Plan that provides, or has any Liability to provide, post-employment life insurance, medical, severance, or other employee welfare benefits to any employee or any dependent of any employee upon his or her retirement or termination of employment, except as may be required by Code Section 4980B; or (ii) has ever represented, promised, or Contracted (whether in oral or written form) to any employee (either individually or to employees as a group) that such employee(s) or dependents would be provided with life insurance, medical, severance, or other employee welfare benefits upon their retirement or termination of employment, except to the extent required by Code Section 4980B.
(j) Except as set forth on Schedule 4.18(j) , or as otherwise expressly contemplated by this Agreement, the execution of this Agreement and the consummation of the Transactions will not (i) constitute an event under any Employee Benefit Plan, Employee Agreement, trust, or loan that will or may result in any payment, acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits, or obligation to fund benefits with respect to any employee, or (ii) result in the triggering or imposition of any restrictions or limitations on the right of any Acquired Entity or Buyer to amend or terminate any Employee Benefit Plan and receive the full amount of any excess assets remaining or resulting from such amendment or termination, subject to applicable Taxes. Except as set forth on Schedule 4.18(j) , no payment or benefit that has been made, will be made, or may be made by any Acquired Entity, Buyer or any of their respective Affiliates with respect to any Acquired Entity’s employee will be characterized as an “excess parachute payment,” within the meaning of Code Section 280G(b)(l).
4.19 Environmental, Health, and Safety Matters.
Except as set forth on Schedule 4.19 , (a) each Acquired Entity is in compliance with all Environmental, Health and Safety Requirements in connection with owning, using, maintaining, or operating its business or assets; (b) each location at which any Acquired Entity operates its business is in compliance with all Environmental, Health and Safety Requirements; and (c) there are no pending or, to the Company’s Knowledge, threatened Actions by any Person that any Acquired Entity’s properties or assets is not, or that its businesses has not been conducted, in
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compliance with all Environmental, Health and Safety Requirements.
4.20 Permits.
The Acquired Entities possess all material Permits required to be obtained for their businesses and operations. Schedule 4.20 sets forth a list of each material Permit, excluding those set forth on Schedule 4.13(f) . Except as set forth on Schedule 4.20 , with respect to each material Permit:
(a) it is valid, subsisting, and in full force and effect;
(b) there are no violations of such Permit that would result in a termination of such Permit;
(c) no Acquired Entity has received written notice that such Permit will not be renewed; and
(d) the Transactions will not adversely affect the validity of such Permit or cause a cancellation of or otherwise adversely affect such Permit.
Notwithstanding the foregoing, no representation or warranty is made in this Section 4.20 with respect to Environmental, Health and Safety Requirements, which are covered exclusively in Section 4.19 .
4.21 Insurance.
Schedule 4.21 sets forth the following information with respect to each insurance policy Contract (including policies providing property, general liability, auto liability, employment practices liability, directors and officers liability, professional liability, workers’ compensation, crime, fiduciary liability coverage and bond and surety arrangements) to which any Acquired Entity has been a party, a named insured, or otherwise the beneficiary of coverage at any time within the past three years:
(a) the name, address, and telephone number of the agent;
(b) the name of the insurer, the name of the policyholder, and the name of each covered insured;
(c) the policy number and the period of coverage;
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(d) the scope (including an indication of whether the coverage was on a claims made, occurrence, or other basis) and amount (including a description of how deductibles and limits are calculated and operate) of coverage; and
(e) description of any retroactive premium adjustments or other loss-sharing arrangements.
With respect to each insurance policy Contract, the Contract is the legal, valid, and binding obligation of the Acquired Entity, enforceable against such Person in accordance with its terms, except as such enforceability may be subject to the effects of bankruptcy, insolvency, reorganization, moratorium, or other Laws relating to or affecting the rights of creditors, and general principles of equity, and will continue to be so enforceable following Closing.
Each Acquired Entity has been covered during the past three years by insurance in scope and amount customary and reasonable for the businesses in which it has engaged during such period. Schedule 4.21 also describes any self-insurance arrangements affecting any Acquired Entity.
4.22 Certain Business Relationships with Acquired Entities.
Except as set forth on Schedule 4.22 , neither Seller nor any of its Affiliates has been involved in any business arrangement or relationship with any Acquired Entity within the past 12 months, and neither Seller nor any of its Affiliates owns any asset that is used in any Acquired Entity’s business.
4.23 Suppliers.
Since the Balance Sheet Date, except as set forth on Schedule 4.23 , to Seller’s Knowledge, no material supplier of any Acquired Entity has provided written notice to any Acquired Entity that it shall stop, or materially decrease the rate of, supplying materials, products or services to such Acquired Entity. All Affiliates of the Seller and, to Seller’s Knowledge, all other material suppliers to the Company, will continue to supply the Acquired Entities after the Closing on substantially the same terms and conditions as provided prior to Closing, subject to price increases in the Ordinary Course of Business consistent with past practice.
4.24 Notes and Accounts Receivable.
All notes and accounts receivable of the Acquired Entities are reflected properly on their books and records, are valid receivables subject to no setoffs or counterclaims, are current and collectible, and will be collected in accordance with their terms at their recorded amounts, subject only to the reserve for bad debts set forth on the face of the balance sheet (rather than in any notes thereto) included as part of the Interim Financial Statements as adjusted for operations and transactions through the Closing Date in accordance with GAAP.
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4.25 Disclaimer of Other Representations and Warranties.
Except as expressly set forth in Section 3.1 and this ARTICLE 4 , Seller makes no representation or warranty, express or implied, at law or in equity, in respect of any of the Acquired Entities or any of their respective assets, liabilities, or operations, including with respect to merchantability or fitness for any particular purpose, and any such other representations or warranties are hereby expressly disclaimed. Buyer hereby acknowledges and agrees that, except to the extent specifically set forth in Section 3.1 and this ARTICLE 4 , Buyer is purchasing the Shares on an “as-is, where-is” basis.
ARTICLE 5. PRE-CLOSING COVENANTS
The Parties agree as follows with respect to the period between the execution of this Agreement and the earlier of the Closing and the Termination Date.
5.1 General.
(a) Each Party shall use its Commercially Reasonable Efforts to take all action and to do all things necessary to consummate and make effective all of the terms of this Agreement and the Transactions applicable to it (including satisfaction, but not waiver, of the Closing conditions for which it is responsible or otherwise in control, as set forth in ARTICLE 7 ). Each Party shall extend all reasonable cooperation to the other Party in order to obtain all consents, conditions or events necessary to consummate and make effective all of the terms of this Agreement, the Transaction Documents and the Transactions contemplated hereby.
(b) Prior to the Closing, the Company or an Acquired Subsidiary shall assign its rights in the assets set forth on Schedule 5.1 to Seller.
(c) Within ten (10) days from the date hereof, “ July 1, 2005 ” in Section 4.13(t) shall be deemed deleted and replaced with “ June 19, 2002 ” and Seller shall deliver to Buyer an updated Schedule 4.13(t) , which shall replace such schedule delivered on the date hereof.
5.2 Notices and Consents.
(a) Seller shall cause the Acquired Entities to give any notices to third parties, and shall cause the Acquired Entities to use their Commercially Reasonable Efforts to obtain any third party Consents for the leases listed on Schedule 4.3 necessary in connection with the Transactions. Seller shall cause each Acquired Entity to give any notices to, make any filings with, and use its Commercially Reasonable Efforts to obtain any third party Consents of Governmental Bodies, if any, required pursuant to any applicable Law in connection with the Transactions.
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(b) Buyer shall cooperate with the Acquired Entities in assisting such Persons in obtaining the Consents for the leases listed on Schedule 4.3 necessary in connection with the Transactions. Buyer shall give any notices to, make any filings with, and use its Commercially Reasonable Efforts to obtain any Consents of Governmental Bodies, if any, required pursuant to any applicable Law in connection with the Transactions.
(c) Each Party shall cooperate and use its Commercially Reasonable Efforts to agree jointly on a method to overcome any objections by any Governmental Body to the Transactions.
(d) Buyer shall cooperate with Seller in obtaining the Consents for the leases listed on Schedule 5.2(d) necessary in connection with the Transactions. If any such Consents are not obtained by the Closing Date, resulting in the closure of any of such stores at such lease locations, Seller shall pay Buyer the amount on Schedule 5.2(d) for the Consent not obtained with respect to any such store within five (5) business days after the date of such store closure; provided , however , that Seller’s Liability hereunder relating to the failure to obtain such Consents shall not exceed $3.0 million in the aggregate. Buyer shall bear any remaining Liability resulting from the failure to obtain any such Consents with respect to the leases listed on Schedule 5.2(d) .
5.3 Operation of Business; Assumption of Certain Liabilities.
No Acquired Entity shall, without the prior written consent of Buyer, engage in any practice, take any action, or enter into any transaction outside the Ordinary Course of Business, other than practices, actions, or transactions that do not have a value exceeding $250,000 in the aggregate. Without limiting the generality of the foregoing, no Acquired Entity shall, without the prior written consent of Buyer, engage in any practice, take any action, or enter into any transaction outside the Ordinary Course of Business, which (i) would be required to be disclosed on Schedule 4.9 , (ii) result in any Material Adverse Change or Effect or (iii) the primary purpose or effect of which would be to generate or preserve Cash. The Seller shall use Commercially Reasonable Efforts to maintain the Acquired Entities’ business intact, including their relations with employees, customers and suppliers. Notwithstanding the foregoing, no Acquired Entity shall (i) terminate, modify, amend, renew, extend or replace any Contract identified on Schedule 4.15 , or (ii) approve the sale of any franchise (other than those disclosed on Schedule 4.13(q) ), without the prior written approval of Buyer, which approval shall not be unreasonably withheld). Seller shall cause the Contracts listed on Schedule 5.3 to be either (i) terminated and shall pay or cause the Company to pay all cancellation or other termination fees and costs related to such terminations or (ii) assigned to and assumed by Seller (without further liability to the Company), in each case prior to the Closing.
5.4 Full Access.
Subject to compliance with applicable Law (including antitrust Laws), each Acquired Entity will permit representatives of Buyer to have access at reasonable times, and in a manner so as not to interfere with the normal business operations of the Acquired Entities, to all
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premises, properties, personnel, books, records, Contracts, and documents pertaining to such Acquired Entity; provided , however , that Buyer shall treat and hold as such any Confidential Information it receives from Seller and the Acquired Entities pursuant to this Section 5.4 and shall not use any of the Confidential Information except in connection with this Agreement and the Transactions. In addition, Seller, the Company and their personnel shall reasonably cooperate and assist Buyer with any and all audits for financial statements of the Company for the fiscal year 2006 which are necessary or appropriate for the Company to remain in compliance with all Laws governing the offering and sale of franchises following the Closing. Seller shall provide to Buyer financial statements for the period ended November 6, 2006 as soon as practicable following such period end.
5.5 Notice of Developments.
Seller shall give prompt written notice to Buyer of (a) any development occurring after the date of this Agreement, or (b) with respect to representations and warranties that are qualified by Knowledge, any item about which the Company did not have Knowledge on the date of this Agreement, which in each case causes or reasonably could be expected to cause a Breach of any of the representations and warranties in ARTICLE 4 . Buyer shall give prompt written notice to Seller of any development occurring after the date of this Agreement that causes or reasonably could be expected to cause a Breach of any of the representations and warranties in Section 3.2 . No disclosure by any Party pursuant to this Section 5.5 shall be deemed to amend and supplement the Schedules and to prevent any misrepresentation or Breach of any representation, warranty, or covenant or affect any rights of indemnification pursuant to Article VIII , other than (in the event the Transactions are consummated) any such Breach that is disclosed in a supplement as having caused a condition specified in Section 7.1(a) or Section7.2(a) not to be satisfied.
5.6 Affiliated Transactions.
Except as disclosed on Schedule 5.6 , Seller shall cause all Contracts and transactions by and between Seller or any Affiliate of Seller, on the one hand, and the Acquired Entities, on the other hand, to be terminated effective as of the Closing, without any cost or continuing obligation to the Acquired Entities or Buyer.
5.7 Repayment of Liabilities from Seller.
At or prior to the Closing, Seller and any Affiliate thereof (other than an Acquired Entity) will satisfy, pay in full, or discharge all Liabilities they may have to the Acquired Entities.
5.8 Discharge of Liabilities to Seller.
At or prior to the Closing, each Acquired Entity shall satisfy, pay in full, or discharge all Liabilities it may have to Seller or any Affiliates thereof (other than an Acquired Entity).
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5.9 Exclusivity.
Seller will not (and Seller will not cause or permit any Acquired Entity or its Affiliates, representatives or advisors to) (i) solicit, initiate, or encourage the submission of any proposal or offer from any Person relating to the acquisition of any capital stock or other voting securities, or any substantial portion of the assets, of any Acquired Entity (including any acquisition structured as a merger, consolidation, or share exchange) or (ii) participate in any discussions or negotiations regarding, furnish any information with respect to, assist or participate in, or facilitate in any other manner any effort or attempt by any Person to do or seek any of the foregoing. No Seller will vote his, her, or its Shares in favor of any such acquisition.
5.10 Satisfaction of Certain Intercompany Accounts.
(a) Any and all other intercompany claims or obligations between Seller and its Affiliates on the one hand and the Company on the other hand shall be terminated without liability of any Party as of the Closing.
(b) The Seller shall create a new limited liability company in the State of Colorado prior to Closing and all records, cash or other assets of the Seller related to the Baja Fresh Gift Card program shall be transferred to such new company prior to the Closing Date.
5.11 Insurance Claims.
Seller shall tender to Scioto Insurance Company or other applicable carriers and diligently prosecute all insurable claims (liability, workers’ compensation and otherwise) that arise on or before the Closing Date. The Company shall be entitled to participate in any proceedings pertaining to such claims at its own cost and expense. The Company shall be notified, and have the right to consult with Seller within two (2) business days of notification, prior to the settlement of any such claim over $10,000.
ARTICLE 6. POST-CLOSING COVENANTS
The Parties agree as follows with respect to the period following the Closing.
6.1 General.
(a) In case at any time after the Closing any further action is necessary to carry out the purposes of this Agreement (including without limitation the assignment or transfer to Buyer of any assets owned and controlled by Seller or any Acquired Entity that as of the Closing Date were utilized exclusively by the Acquired Entities in the conduct of its business), each of the Parties shall take such further action (including the execution and delivery of such further instruments and documents) as the other Party reasonably may request, all at the sole cost
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and expense of the requesting Party (unless the requesting Party is entitled to indemnification therefor under ARTICLE 8 ).
(b) In case at any time after the Closing Seller pursues or continues to pursue any Action, the rights to which Buyer has assigned to Seller as set forth on Schedule 5.1 , Buyer shall provide assistance to Seller as Seller may reasonably request for Seller to pursue such Action, all at the sole cost and expense of Seller.
6.2 Tax Matters.
(a) Any tax-sharing agreement between the Affiliated Group including Seller and the Acquired Entities shall be terminated as of the Closing Date and shall have no further effect for any taxable year (whether the current year, a future year, or a past year).
(b) The Affiliated Group including Seller shall include the income of the Acquired Entities (including any deferred items triggered into income by Reg. §1.1502-13 and any excess loss account taken into income under Reg. §1.1502-19) on the consolidated federal Income Tax Returns of the Affiliated Group including Seller for all periods through the Closing Date and pay any federal Income Taxes attributable to such income. For all taxable periods ending on or before the Closing Date, Seller shall cause the Acquired Entities to join in the consolidated federal Income Tax Return of the Affiliated Group including Seller and, in jurisdictions requiring separate reporting from Seller, to file separate company state and local Income Tax Returns. All such Tax Returns shall be prepared and filed in a manner consistent with prior practice, except as required by a change in applicable law. Buyer shall cause the Acquired Entities to furnish information to Seller as reasonably requested by Seller to allow Seller to satisfy its obligations under this Section 6.2 in accordance with past custom and practice. The Acquired Entities and Buyer shall consult and cooperate with Seller as to any elections to be made on returns of the Acquired Entities for periods ending on or before the Closing Date.
(c) Buyer shall cause the Acquired Entities to file Income Tax Returns or shall include the Acquired Entities in its combined or consolidated Income Tax Returns, for all periods other than periods ending on or before the Closing Date.
(d) Seller shall not settle any audit of a consolidated federal Income Tax Return of the Affiliated Group including Seller to the extent that such return relates to the Acquired Entities in a manner that would adversely affect the Acquired Entities after the Closing Date unless such settlement would be reasonable in the case of a Person that owned the Acquired Entities both before and after the Closing Date.
(e) At Seller’s request, Buyer shall cause any of the Acquired Entities to make or join with Seller in making any other election if the making of such election does not have an
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adverse impact on Buyer (or any of the Acquired Entities) for any post-acquisition Tax period.
(f) Buyer and Seller agree to report all transactions not in the Ordinary Course of Business occurring on the Closing Date after Buyer’s purchase of the Acquired Entities on Buyer’s federal Income Tax Return to the extent permitted by Reg. §1.1502-76(b)(1)(ii)(B).
(g) In the case of any taxable period that includes (but does not end on) the Closing Date (a “ Straddle Period ”),
| (i) | the amount of any Taxes based on or measured by income, receipts, sales or, in the case of purchases, use Tax, of the Acquired Entities for the Pre-Closing Tax Period shall be determined based on an interim closing of the books as of the close of business on the day preceding the Closing Date; |
| (ii) | the amount of any employment Taxes (e.g., FICA, Medicare, FUTA, and Income Tax withholding from wages) of the Acquired Entities accrued for the Pre-Closing Tax Period shall be determined based on an interim closing of the books as of the close of business on the day preceding the Closing Date; and |
| (iii) | the amount of other Taxes of the Acquired Entities for a Straddle Period that relates to the Pre-Closing Tax Period shall be deemed to be the amount of such Tax for the entire taxable period multiplied by a fraction, the numerator of which is the number of days in the taxable period ending on the day preceding the Closing Date and the denominator of which is the number of days in such Straddle Period. |
(h) Any Tax refunds that are received by Buyer or the Acquired Entities, and any amounts credited against Tax to which Buyer and the Acquired Entities become entitled, that relate to Tax periods or portions thereof ending before the Closing Date shall be for the account of Seller, and Buyer shall pay over to Sellers any such refund or the amount of any such credit within 15 days after receipt or entitlement thereto. In addition, to the extent that a claim for refund or a proceeding results in a payment or credit against Tax by a taxing authority to Buyer or the Acquired Entities of any amount accrued on the Closing Balance Sheet, Buyer shall pay such amount to Seller within 15 days after receipt or entitlement thereto.
(i) Buyer, the Acquired Entities and Seller shall cooperate fully, as and to the extent reasonably requested by the other Party, in connection with the filing of Tax Returns pursuant to this Section 6.2 and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon the other Party’s request) the provision of records and information that are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. Buyer, the Acquired Entities
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and Seller agree (i) to retain all books and records with respect to Tax matters pertinent to the Acquired Entities relating to any taxable period beginning before the Closing Date until the expiration of the statute of limitations (and, to the extent notified by Buyer or Seller, any extensions thereof) of the respective taxable periods, and to abide by all record retention agreements entered into with any taxing authority, and (ii) to give the other Party reasonable written notice prior to transferring, destroying or discarding any such books and records and, if the other Party so requests, the Acquired Entities or Seller, as the case may be, shall allow the other Party to take possession of such books and records. Buyer and Seller further agree, upon request, to use their best efforts to obtain any certificate or other document from any governmental authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated hereby). Buyer and Sellers further agree, upon request, to provide the other Party with all information that either Party may be required to report pursuant to Section 6043 or 6043A of the Code, or Treasury Regulations promulgated thereunder.
(j) Seller shall be liable for, shall pay to the appropriate Tax authorities, and shall indemnify and hold the Acquired Entities harmless against, all Taxes of the Acquired Entities that relate to (i) the taxable periods ending before or on the Closing Date, subject to Section 6.2(f), and (ii) the Pre-Closing Tax Period. Seller shall be entitled to all Tax refunds (including interest), Tax deductions and Tax deduction carryforwards attributable to the taxable periods in respect of which Seller is so obligated to indemnify Buyer and the Acquired Entities.
(k) Buyer and the Acquired Entities shall be liable for, shall pay to the appropriate Tax authorities, and shall indemnify and hold Seller harmless against, all Taxes of the Acquired Entities that relate to (i) the taxable periods that begin after the Closing Date, subject to Section 6.2(f), and (ii) the Post-Closing Tax Period. Buyer and the Acquired Entities shall be entitled to all Tax refunds (including interest), Tax deductions and Tax deduction carryforwards attributable to the taxable periods in respect of which Buyer and the Acquired Entities are so obligated to indemnify Seller.
6.3 Employment and Benefits Matters.
(a) Except as set forth in Schedule 6.3(a) , Buyer agrees to continue the employment immediately after the Closing of all persons who, immediately prior to the Closing, are employed by the Acquired Entities, including, without limitation, employees on disability leave of absence or other leave of absence where reemployment rights are guaranteed by applicable Law. Such continued employment shall include provision for compensation and benefits substantially comparable in the aggregate to the compensation and benefits in effect for such employees immediately prior to the Closing Date (it being understood that Buyer does not now or has no present intention to maintain any retirement, pension, savings or similar plan). Notwithstanding the foregoing, nothing herein shall be deemed to require Buyer to continue to employ any such employee for any specific period of time after the Closing Date; provided , Buyer shall indemnify Seller for all Liability pursuant to the WARN Act that may be triggered as a result of any discharge of employees other than for cause during the 60-day period after the
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Closing Date. Seller shall be responsible for and shall pay in a timely manner (i) all cash awards, retention bonuses, and severance, change of control or other termination payments due to the employees identified on Schedule 6.3(a)(i) ; (ii) all cash awards in lieu of stock due to the employees identified on Schedule 6.3(a)(ii) ; (iii) all retention bonuses for the employees identified on Schedule 6.3(a)(iii ); provided, however, that to the extent any such employees remain employed by the Company for at least six (6) months following the Closing Date or are terminated for any reason other than “cause” during such six month period, Buyer shall be responsible for any such retention bonus, up to $100,000 in the aggregate; and (iv) all retention bonuses, and severance, change of control or other termination payments due to the employees identified on Schedule 6.3(a)(iv) in excess of $150,000. Buyer shall be responsible for the initial $150,000 of the retention bonuses, and severance, change of control or other termination payments due to the employees referenced in clause (iv) of the immediately preceding sentence.
(b) To the extent the Company Employee Benefit Plans and compensation arrangements are sponsored and maintained by Seller for the benefit of Seller employees other than employees of the Acquired Entities, effective as of the Closing Date, Seller will, and will cause the Company to, terminate the Company’s status as an adopting employer in all Seller Employee Benefit Plans and effective immediately after the Closing Date, Buyer will provide or cause the Company to provide the employees with benefits under employee benefit plans, programs and arrangements that are substantially comparable in the aggregate to those provided to and covering employees of the Acquired Entities in accordance with their terms as in effect immediately before the Closing Date, but at a minimum such benefits shall include group health plan coverage that satisfies the requirements of Code Section 4980B(f)(2)(B)(iv)(I) and, subject to Sections 6.3(c) and 6.3(d) hereof, similar Employee Pension Benefits Plans. Buyer shall provide or cause the Company to provide to those individuals who were employees of the Acquired Entities as of the Closing Date and to any M&A qualified beneficiaries (as such term is defined in Reg. § 54.4980B-9, Q&A, et seq.) such substantially comparable group health plan benefits from the Closing Date through the end of the continuation coverage period applicable to M&A qualified beneficiaries under the Seller’s group health plans. Buyer shall bear the total cost and liability for all Company bonus plans and arrangements that become payable on or after the Closing Date.
(c) Seller shall be solely responsible for the administration of any defined contribution plan or any defined benefit plan maintained by the Seller or the Company for the benefit of employees of the Acquired Entities prior to Closing. Buyer shall provide Seller with access to information reasonably necessary in order to carry out the provisions of this Section 6.3(c) . All persons employed by the Acquired Entities shall be deemed terminated from Seller in connection with a disposition as of the Closing Date and shall receive distribution of their vested benefits (if any) under each plan’s normal distribution processes.
(d) Awards to employees of the Acquired Entities under the Seller’s 2003 Stock Incentive Plan shall be subject to the exercise provisions of such plan that treat a sale or other disposition of a subsidiary as a termination of employment that accelerates vesting of any unvested stock compensation granted under the plan and that entitles the employee to exercise
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outstanding options for one year from the date of the transaction (but in no event longer than the maximum term of the option). Seller shall be solely responsible for satisfaction of such awards and related exercises. Buyer shall provide Seller with access to information reasonably necessary in order to allow Seller to provide notifications to employees of the Acquired Entities.
6.4 Net Working Capital Adjustment.
Seller shall provide the Closing Statement pursuant to Section 2.3(b) and the Parties shall cooperate to make the payment required, if any, pursuant to Section 2.3(b) for the Net Working Capital Adjustment.
6.5 Transition.
Seller shall not take any action that is designed or intended to have the effect of discouraging any lessor, licensor, customer, supplier, or other business associate of Acquired Entity from maintaining the same business relationships with any Acquired Entity after the Closing as it maintained with such Acquired Entity prior to the Closing.
6.6 Transition Services.
Seller shall provide the services identified on Schedule 6.6 to Buyer and/or the Acquired Entities, for the time periods identified on such schedule.
6.7 Confidentiality.
Seller will treat and hold as such all of the Confidential Information, refrain from using any of the Confidential Information except in connection with any Transaction Document or as contemplated by this Section 6.6 , and deliver promptly to Buyer or destroy, at the request and option of Buyer, all tangible embodiments (and all copies) of the Confidential Information that are Seller’s possession. In the event that Seller is requested or required pursuant to oral or written question or request for information or documents in any Action to disclose any Confidential Information, Seller will notify Buyer promptly of the request or requirement so that Buyer may seek an appropriate protective order or waive compliance with the provisions of this Section 6.6 . If, in the absence of a protective order or the receipt of a waiver hereunder, Seller is, on the advice of counsel, compelled to disclose any Confidential Information to any Governmental Body or else stand liable for contempt, Seller may disclose the Confidential Information to the Governmental Body; provided, however, that Seller shall use its Commercially Reasonable Efforts to obtain, at the reasonable request of Buyer, an order or other assurance that confidential treatment will be accorded to such portion of the Confidential Information required to be disclosed as Buyer shall designate.
ARTICLE 7. CONDITIONS TO OBLIGATION TO CLOSE
7.1 Conditions Precedent to Buyer’s Obligation.
Buyer’s obligation to consummate the Transactions contemplated to occur in connection
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with the Closing is subject to satisfaction of each condition precedent listed below. Consummation by Buyer of the Transactions shall be deemed to waive compliance with any unsatisfied condition precedent set forth in this Section 7.1 to the extent that Buyer has Knowledge that such condition precedent remains unsatisfied.
(a) Accuracy of Representations and Warranties. Each representation and warranty set forth in Section 3.1 and ARTICLE 4 must have been accurate and complete in all material respects (except with respect to any provisions including the word “material” or words of similar import, and except with respect to materiality, as reflected under GAAP, in the representations in Section 4.8 relating to the Financial Statements, with respect to which such representations and warranties must have been accurate and complete in accordance with their terms) as of the date of this Agreement, and must be accurate and complete in all material respects (except with respect to any provisions including the word “material” or words of similar import and except with respect to materiality, as reflected under GAAP, in the representations in Section 4.8 relating to the Financial Statements, with respect to which such representations and warranties must have been accurate and complete in accordance with their terms) as of the Closing Date, as if made on the Closing Date, after giving effect to any permitted supplements to the Schedules delivered by Seller prior to the Closing pursuant to Section 5.5 ; provided , however , that the condition precedent set forth in this Section 7.1(a) shall be deemed fulfilled unless the failure of the representations and warranties to be accurate and complete results in a Material Adverse Change from the representations and warranties given as of the date of this Agreement.
(b) Compliance with Obligations. Seller shall have performed and complied with all its covenants required by this Agreement to be performed or complied with at or prior to Closing (singularly and in the aggregate) in all material respects (except with respect to any provisions including the word “material” or words of similar import, with respect to which such provision must have been accurate and complete in accordance with its terms).
(c) No Material Adverse Change. Since the date of this Agreement there must have been no event, series of events or the lack of occurrence thereof which, singularly or in the aggregate, has had or will have a Material Adverse Effect.
(d) No Adverse Litigation. There must not be pending or, to Seller’s Knowledge, threatened any Action by or before any Governmental Body, arbitrator, or mediator that seeks to restrain, prohibit, invalidate, or collect Damages arising out of the Transactions, or that makes it inadvisable to proceed with the Transactions on the basis that it has had or will have a Material Adverse Effect.
(e) Consents. Except for the Consents identified on Schedule 4.3 and Schedule 5.2(d) , Seller and Buyer must have received Consents to the Transactions and waivers of rights to terminate or modify any rights or obligations of any Acquired Entity from any Person (i) from whom such Consent is required, including under any Contract listed on Schedules
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4.12(b) , 4.13(a) , 4.15 , 4.18(a) , or 4.21 or any Law, or (ii) who as a result of the Transactions, would have such rights to terminate or modify such Contracts, either by their terms or as a matter of Law, unless, in each case, the failure to receive such consents or waivers either individually or in the aggregate would not have a Material Adverse Effect.
(f) No Order or Injunction. There must not be issued and in effect any Order restraining or prohibiting the Transactions.
Buyer may waive any condition specified in this Section 7.1 if it executes a writing so stating at or prior to the Closing.
7.2 Conditions Precedent to Seller’s Obligation.
Seller’s obligation to consummate the Transactions in connection with the Closing is subject to satisfaction of each condition precedent listed below. Consummation by Seller of the Transactions shall be deemed to waive compliance with any unsatisfied condition precedent set forth in this Section 7.2 to the extent that Seller has Knowledge that such condition precedent remains unsatisfied.
(a) Accuracy of Representations and Warranties. Each representation and warranty set forth in Section 3.2 must have been accurate and complete in all material respects (except with respect to any provisions including the word “material” or words of similar import, with respect to which such representations and warranties must have been accurate and complete in accordance with their terms) as of the date of this Agreement, and must be accurate and complete in all material respects (except with respect to any provisions including the word “material” or words of similar import, with respect to which such representations and warranties must have been accurate and complete in accordance with their terms) as of the Closing Date, as if made on the Closing Date; after giving effect to any permitted supplements to the Schedules delivered by Buyer prior to the Closing pursuant to Section 5.5 ; provided , however , that the condition precedent set forth in this Section 7.2(a) shall be deemed fulfilled unless any failure of the representations and warranties to be accurate and complete results in a Material Adverse Change from the representations and warranties given by Buyer as of the date of this Agreement.
(b) Compliance with Obligations. Buyer shall have performed and complied with all its covenants required by this Agreement to be performed or complied with at or prior to Closing (singularly and in the aggregate) in all material respects (except with respect to any provisions including the word “material” or words of similar import, with respect to which such provision must have been accurate and complete in accordance with its terms).
(c) No Order or Injunction. There must not be issued and in effect any Order restraining or prohibiting the Transactions.
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Seller may waive any condition specified in this Section 7.2 if it executes a writing so stating at or prior to the Closing.
ARTICLE 8. INDEMNIFICATION
8.1 Survival of Representations and Warranties.
(a) Each representation and warranty of Seller and the Acquired Entities contained in Section 3.1 and ARTICLE 4 , respectively, and any certificate related to such representations and warranties shall survive the Closing and will continue in full force and effect for twelve months thereafter, except that (y) Breaches of Section 4.11 shall survive six months after the expiration of the applicable statue of limitations and (z) Breaches of Sections 4.1 and 4.2 shall survive indefinitely and not expire.
(b) Each representation and warranty of Buyer contained in Section 3.2 and any certificate related to such representations and warranties shall survive the Closing and continue in full force and effect for twelve months thereafter except for Breaches of Section 3.2(a) and 3.2(b) , which shall survive indefinitely and not expire
8.2 Indemnification Provisions for Buyer’s Benefit.
Seller shall, from and after the Closing Date and subject to the provisions of this ARTICLE 8 , indemnify and hold the Buyer Indemnified Parties harmless from and pay any and all Damages directly or indirectly resulting from, relating to, arising out of, or attributable to any one of the following:
(a) Any Breach of any representation or warranty Seller has made in this Agreement as if such representation or warranty were made on and as of the Closing Date without giving effect to any supplement to the Schedules, other than (in the event the Transactions are consummated) any such Breach that is disclosed in a supplement to the Schedules delivered under Section 5.5, as having caused a condition specified in Section 7.1 not to be satisfied.
(b) Any Liability of any of the Acquired Entities for Taxes of any Person other than of the Acquired Entities under Reg. § 1.1502-6 (or any similar provision of state, local or foreign law), including Tax owed by Seller due to this indemnification payment.
(c) Any Breach by Seller of any covenant or obligation of Seller in this Agreement, including, but not limited to, those provided in Sections 5.2(d) and 6.3(a ).
(d) Any litigation or formal proceeding set forth on Schedule 4.16 as of the
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date of this Agreement or, to which to Seller’s Knowledge, any Acquired Entity is a party as of the date of this Agreement.
(e) Any litigation by a Franchisee, regardless of whether it is identified on Schedule 4.16 , arising out of any state of facts existing as of the Closing Date that would have a Material Adverse Effect.
8.3 Indemnification Provisions for Seller’s Benefit.
Buyer shall indemnify and hold the Seller Indemnified Parties harmless from and pay any and all Damages directly or indirectly resulting from, relating to, arising out of, or attributable to any of the following:
(a) Any Breach of any representation or warranty Buyer has made in this Agreement as if such representation or warranty were made on and as of the Closing Date, without giving effect to any supplement to the Schedules, other than (in the event the Transactions are consummated) any such Breach that is disclosed in a supplement to the Schedules delivered under Section 5.5, as having caused a condition specified in Section 7.2 not to be satisfied.
(b) Any additional Tax owed by Seller (including Tax owed by Seller due to this indemnification payment) resulting from any transaction engaged in by any of the Acquired Entities not in the Ordinary Course of Business occurring on the Closing Date after Buyer’s purchase of the Acquired Entities.
(c) Any Breach by Buyer of any covenant or obligation of Buyer in this Agreement.
8.4 Indemnification Claim Procedures.
(a) If any Action is commenced in which any Indemnified Party is a party that may give rise to a claim for indemnification against any Indemnitor under Sections 8.2 or 8.3 (an “ Indemnification Claim ” ), then such Indemnified Party must promptly give notice to the Indemnitor. The failure to give such notice shall not affect whether an Indemnitor is liable for reimbursement hereunder unless such failure has resulted in the loss of material substantive rights with respect to the Indemnitor’s ability to defend such Indemnification Claim, and then only to the extent of such loss. The Indemnitor shall have the right to contest and defend against an Indemnification Claim. Notice of the intention to so contest and defend must be given by the Indemnitor to the Indemnified Party within 20 business days after the Indemnified Party’s notice of such Indemnification Claim. Such contest and defense must be conducted by reputable attorneys employed by the Indemnitor and approved by the Indemnified Party (which approval shall not be unreasonably withheld or delayed). The Indemnified Party will be entitled, at its
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own cost and expense (which expense will not constitute Damages unless the Indemnified Party reasonably determines that the Indemnitor is not adequately representing or, because of a conflict of interest, may not adequately represent, the interests of the Indemnified Parties, and has provided the Indemnitor with notice of such determination, and then only to the extent that such expenses are reasonable), to participate in such contest and defense and to be represented by attorneys of its or their own choosing. If the Indemnified Party elects to participate in such defense, the Indemnified Party shall cooperate with the Indemnitor in the conduct of such defense. Neither the Indemnified Party nor the Indemnitor may concede, settle or compromise any Indemnification Claim without the consent of the other party, which consent shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, if the Indemnitor fails to acknowledge in writing its obligation to provide indemnification in respect of such Indemnification Claim, to assume the defense thereof with counsel reasonably satisfactory to the Indemnified Party or to diligently contest and defend such Indemnification Claim, then the Indemnified Party alone shall be entitled to contest, defend and settle such Indemnification Claim in the first instance (in which case, all expenses incurred in connection therewith will constitute Damages) and, only if the Indemnified Party chooses not to contest, defend or settle such Indemnification Claim, the Indemnitor shall then have the right to contest and defend (but not settle) such Indemnification Claim at the Indemnitor’s expense.
(b) In the event any Indemnified Party has a claim against any Indemnitor that does not involve an Indemnification Claim (i.e., a direct claim), the Indemnified Party shall deliver notice of such claim with reasonable promptness to the Indemnitor. The failure to give such notice shall not affect whether an Indemnitor is liable for reimbursement unless such failure has resulted in the loss of substantive rights with respect to the Indemnitor’s ability to defend such claim, and then only to the extent of such loss.
8.5 Limitations on Indemnification Liability.
(a) With Respect to Claims by Buyer Indemnified Parties. Any claims the Buyer Indemnified Parties make for indemnification under Section 8.2 shall be limited as follows:
(i) Ceiling . Seller’s aggregate Liability for money Damages under this Agreement related to Breaches of the representations, warranties, and covenants herein will not exceed $4,500,000 (the “ Buyer Indemnified Parties Ceiling Amount ”), provided that the limitation contemplated hereby shall not be applicable with respect to (A) Breaches of Sections 3.1 , 4.1 , 4.2 , 4.5 or 4.16 , (B) instances of fraud by Seller, or (C) or any claim pursuant to Sections 8.2(b) , 8.2(c) or 8.2(d) .
(ii) Basket/Threshold . Seller shall have no Liability for money Damages related to Breaches of the representations, warranties, and covenants herein unless and until the aggregate Damages claimed under Section 8.2 exceeds $150,000 (the “ Buyer Indemnified Parties Threshold Amount ”); provided ,
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however , that once such amount exceeds the Buyer Indemnified Parties Threshold Amount, the Buyer Indemnified Parties shall be entitled to recover all Damages in excess of $150,000 up to, if applicable, the Buyer Indemnified Parties Ceiling Amount; provided , further , that the Buyer Indemnified Parties Threshold Amount shall not be applicable with respect to (A) Breaches of Section 3.1 , 4.1 , 4.2 , 4.5, or 4.16, (B) instances of fraud by Seller, or (C) any claim pursuant to Sections 8.2(b) , 8.2(c) or 8.2(d).
(b) With Respect to Claims by Seller Indemnified Parties. Any claims the Seller Indemnified Parties make for indemnification under Section 8.3 shall be limited as follows:
(i) Ceiling . Buyer’s aggregate Liability for money Damages under this Agreement related to Breaches of the representations and warranties herein will not exceed $4,500,000 (the “ Seller Indemnified Parties Ceiling Amount ”), provided that the limitation contemplated hereby shall not be applicable with respect to (A) Breaches of Sections 3.2(a) or 3.2(b), instances of fraud by Buyer, or (C) any claim pursuant to Sections 6.3(a) , 8.3(b) or 8.3(c) .
(ii) Basket/Threshold . Buyer shall have no Liability for money Damages related to Breaches of the representations and warranties in Section 3.2 unless and until the aggregate of Damages claimed under Section 8.3 exceeds $150,000 (the “ Seller Indemnified Parties Threshold Amount ”); provided , however , that once such amount exceeds the Seller Indemnified Parties Threshold Amount, the Seller Indemnified Parties shall be entitled to recover Damages in excess of $150,000 up to, if applicable, the Seller Indemnified Parties Ceiling Amount; provided , further , that the Seller Indemnified Parties Threshold Amount shall not be applicable with respect to (A) Breaches of Section 3.2(a) or 3.2(b), (B) instances of fraud by Buyer, or (C) any claim pursuant to Sections 6.3(a) , 8.3(b) or 8.3(c) .
(c) With Respect to Claims by any Indemnified Party. Any claims any Indemnified Party makes under this ARTICLE 8 shall be limited as follows:
(i) Reduction for Insurance Claims . The amount required to be paid for Damages shall be reduced to the extent of any amounts an Indemnified Party actually receives pursuant to the terms of its existing or future insurance policies (if any) covering such Indemnification Claim.
8.6 Sophistication of Buyer.
Buyer represents and warrants that it has such knowledge and experience in financial, tax
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and business matters as to enable it to utilize the due diligence information made available to it in investigating the Transactions, to evaluate the merit and risks of the Transactions, and to make an informed decision with respect thereto. Prior to the Closing Date, if Buyer becomes aware of any fact, circumstance or event that would cause a representation, warranty, covenant, or agreement of Seller to be in Breach, Buyer shall promptly notify Seller of the same and allow Seller to amend the Schedules to reflect the same.
8.7 Other Indemnification Provisions.
Any Liability of the Acquired Entities to any Seller Indemnified Party under this Agreement shall terminate for all purposes upon Closing and have no further force or effect.
8.8 Exclusive Remedy.
From and after the Closing Date, the right to proceed against an Indemnitor for any claim under ARTICLE 8 shall be the sole and exclusive post-Closing remedy (except in the case of fraud) available under contract, tort or any other legal theory, to any Indemnified Party (a) for Breach of any representation, warranty, or covenant under this Agreement, or (b) otherwise arising out of or in connection with this Agreement or the Transactions, and no Indemnified Party shall have the right to bring any other Action or otherwise pursue any other remedy whatsoever. Nothing contained herein shall be deemed to limit any recovery available to any Party for any failure of any other Party to consummate the Transactions in accordance with the terms hereof.
ARTICLE 9. TERMINATION
9.1 Termination of Agreement.
The Parties may terminate this Agreement as provided below:
(a) Buyer and Seller may terminate this Agreement by mutual written consent at any time prior to the Closing.
(b) Buyer or Seller may terminate this Agreement upon delivering written notice if the Closing has not occurred prior to the Expiration Date, provided that the Party delivering such notice has not caused such failure to close.
(c) Buyer may terminate this Agreement by giving written notice to Seller at any time prior to the Closing if there has been a Material Adverse Change or any Acquired Entity has Breached any representation, warranty, or covenant contained in this Agreement in any material respect (except with respect to materiality for any provisions including the word “material” or words of similar import and Section 4.8 , in which case such termination rights shall
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arise, subject to the remainder of this sentence, upon any Breach of such provision in accordance with its terms) and such Breaches have, singularly or in the aggregate, had a Material Adverse Effect.
(d) Seller may terminate this Agreement by giving notice to Buyer at any time prior to the Closing if Buyer has Breached any representation, warranty, or covenant contained in this Agreement in any material respect (except with respect to materiality for any provisions including the word “material” or words of similar import, in which case such termination rights shall arise upon any Breach of such provision in accordance with its terms).
9.2 Effect of Termination.
If any Party terminates this Agreement pursuant to Section 9.1 , all rights and obligations of the Parties hereunder shall terminate without any liability of any Party to any other Party (except for any liability of any Party then in breach).
(a) Except for the obligations under this ARTICLE 9 and ARTICLE 10 , if this Agreement is terminated under Section 9.1 , then, except as provided in this Section 9.2 , all further obligations of the Parties under this Agreement shall terminate.
(b) In the event this Agreement is terminated by Buyer or Seller pursuant to Section 9.1 , the Parties shall not make any statements that defame, disparage, or reflect negatively upon the other Party in any way.
ARTICLE 10. MISCELLANEOUS
10.1 Press Releases and Public Announcements.
No Party shall issue any press release or make any public announcement relating to the subject matter of this Agreement prior to the Closing without the prior written approval of Seller or Buyer, as the case may be; provided , however , that any Party may make any public disclosure it believes in good faith is required by applicable Law or any listing or trading agreement concerning its publicly-traded securities (in which case the disclosing Party shall use its reasonable best efforts to advise the other Parties prior to making the disclosure).
10.2 No Third-Party Beneficiaries.
Except as otherwise expressly provided in this Agreement, this Agreement shall not confer any rights or remedies upon any Person other than the Parties and their respective successors and permitted assigns.
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10.3 No Code Section 338 Election.
Neither Buyer nor Seller shall make any election under Code Section 338 with respect to the transactions contemplated by this Agreement.
10.4 Entire Agreement.
This Agreement, together with the Exhibits and Schedules to this Agreement and the certificates, documents, instruments, and writings that are delivered pursuant to this Agreement, together constitutes the entire agreement and understanding among the Parties in respect of its and their subject matter and supersedes any prior understandings, agreements, or representations by or among the Parties, written or oral, to the extent they relate in any way to the subject matter of this Agreement or the Transactions.
10.5 Succession and Assignment.
All of the terms, agreements, covenants, representations, warranties, and conditions of this Agreement are binding upon, and inure to the benefit of and are enforceable by, the Parties and their respective successors and permitted assigns. No Party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval of the other Party; provided , however , that Buyer may (a) assign any or all of its rights and interests hereunder to one or more of its Affiliates, (b) designate one or more of its Affiliates to perform its obligations hereunder, and/or (c) assign its rights under ARTICLE 8 to any lender providing financing to Buyer (in any or all of which cases Buyer nonetheless shall remain responsible for the performance of all of its obligations hereunder, including its indemnification obligations).
10.6 Counterparts.
This Agreement may be executed in one or more counterparts (including by means of facsimile), each of which shall be deemed an original but all of which together shall constitute one and the same instrument.
10.7 Headings.
The article and section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement.
10.8 Notices.
All notices, requests, demands, claims, and other communications hereunder shall be in writing, addressed to the intended recipient as set forth below, and shall be deemed to have been
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duly given when actually received or refused by the intended recipient:
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If to Seller: Wendy’s International, Inc. Attn: General Counsel 4288 West Dublin Granville Road P.O. Box 256 Dublin, OH 43017 Tel: (614) 764-3210 Fax: (614) 764-3243 |
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Copy to (which will not constitute notice): Akin Gump Strauss Hauer & Feld LLP Attn: Steve Patterson, Esq. Robert S. Strauss Building 1333 New Hampshire Avenue, N.W. Washington, D.C. 20036 Tel: (202) 887-4152 Fax: (202) 955-7614 |
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If to Buyer: Caliber Capital Group, LLC Attn: David Kim 2000 E. Winston Road Anaheim, California 92806 Tel: (714) 507-1998 Fax: (714) 507-1997 |
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Copy to (which will not constitute notice): Goodwin Proctor Attn: Thomas C. Meriam, Esq. 599 Lexington Avenue New York, New York 10022 Tel: (212) 813-8810 Fax: (212) 355-3333 |
Any Party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any means (including personal delivery, expedited courier, messenger service, registered or certified mail, return receipt request and postage prepaid). Any Party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other Parties notice in the manner set forth in this Agreement.
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10.9 Governing Law.
Except for any other Law of mandatory application, this and the performance of the Transactions and obligations of the Parties hereunder shall be governed by and construed in accordance with the Laws of the State of New York without giving effect to any choice of Law principles.
10.10 Amendments and Waivers.
No amendment of any provision of this Agreement shall be valid unless the same is in writing and signed by Buyer and Seller. No waiver by any Party of any provision of this Agreement or any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be valid unless the same is in writing and signed by the Party making such waiver, nor shall such waiver be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence.
10.11 Severability.
Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions of this Agreement or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction.
10.12 Expenses.
Except as otherwise expressly provided in this Agreement, each Party will bear its own costs and expenses incurred in connection with the preparation, execution and performance of this Agreement and the Transactions, including all fees and expenses of agents, representatives, financial advisors, legal counsel, and accountants. Seller shall bear all costs and expenses of Goldman Sachs & Co. incurred in connection with the Transactions and no costs and expenses of Seller shall be charged to the Company.
10.13 Construction.
This Agreement has been freely and fairly negotiated between the Parties. If an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local, or foreign Law shall be deemed to refer to Law as amended and all rules and regulations promulgated thereunder, unless the context requires otherwise. The words “include,” “includes,” and “including” shall be deemed to be followed by “without limitation.” Pronouns in masculine, feminine, and neuter genders shall be construed to
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include any other gender, and words in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires. The words “this Agreement,” “herein,” “hereof,” “hereby,” “hereunder,” and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. The Parties intend that each representation, warranty, and covenant contained in this Agreement shall have independent significance. If any Party has breached any representation, warranty, or covenant contained in this Agreement in any respect, the fact that there exists another representation, warranty, or covenant relating to the same subject matter (regardless of the relative levels of specificity) that the Party has not breached shall not detract from or mitigate the fact that the Party is in breach of the first representation, warranty, or covenant.
10.14 Incorporation of Exhibits, Annexes, and Schedules.
The Exhibits and Schedules are incorporated in this Agreement by reference and made a part of this Agreement.
[The next page is the signature page]
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IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first above written.
| WENDY’S INTERNATIONAL, INC. | ||
| By: |
/s/ Jonathan Catherwood |
|
| Name: | Jonathan Catherwood | |
| Title: | Executive Vice President, M&A and Treasurer |
| CALIBER CAPITAL GROUP, LLC | ||
| By: |
/s/ David Kim |
|
| Name: | David Kim | |
| Title: | Managing Director |
Exhibit 10(z)
EMPLOYMENT AGREEMENT
THIS AGREEMENT (“Agreement”), dated as of January 22, 2007, between WENDY’S INTERNATIONAL, INC., an Ohio corporation (the “Company”), and Kerrii B. Anderson, a resident of Ohio (the “Executive”),
WITNESSETH:
WHEREAS, the Company desires to continue to retain the services of the Executive as Chief Executive Officer and President and the Executive desires to provide services in such capacity to the Company, upon the terms and subject to the conditions hereinafter set forth; and
WHEREAS, the Compensation Committee of the Board of Directors (the “Board”) of the Company (the “Compensation Committee”) has approved the terms of this Agreement; and
NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and obligations hereinafter set forth, the parties hereto, intending to be legally bound, hereby agree as follows:
1. Employment Term.
The Company hereby agrees to employ the Executive, and the Executive hereby agrees to enter into employment, as Chief Executive Officer and President of the Company (subject to section 2, below) for the period commencing on November 10, 2006 and ending on November 9, 2009 unless terminated sooner pursuant to Section 6 hereof (the “Term of Employment”), provided , however , that the Term of Employment shall be renewed for successive one (1) year periods, each commencing on a November 10, unless either party gives written notice of its intent not to renew at least one hundred twenty (120) days prior to the expiration of the Term of Employment then in effect (any such notice, a “Nonrenewal”).
2. Duties and Extent of Services.
(a) During the Term of Employment, the Executive shall serve as Chief Executive Officer and President of the Company reporting to the Board, and, in such capacities, shall render such executive, managerial, administrative and other services as customarily are associated with and incident to such positions at comparable publicly traded corporations, and as the Company may, from time to time, reasonably require of her consistent with such positions; provided, however , that the Company may appoint a separate President, subject to the Executive’s approval of the separation of the Chief Executive Officer and President positions and of the executive selected as President, which the Executive may not withhold unreasonably.
(b) The Executive shall also hold such other positions and executive offices of the Company and/or of any of the Company’s subsidiaries or affiliates as may from time to time be agreed to by the Executive or assigned by the Board, provided that each such position shall be commensurate with the Executive’s standing in the business community as Chief Executive Officer. The Executive shall not be entitled to any compensation other than the compensation provided for herein for serving during the Term of Employment in any other office or position of the Company or of any of its subsidiaries or
affiliates, unless the Board or a committee thereof with authority to do so shall specifically approve such additional compensation.
(c) The Executive shall be a full-time employee of the Company and shall devote all her business time and efforts exclusively, faithfully and competently to the Company and shall diligently perform to the best of her ability all of the duties required of her as Chief Executive Officer and President (as applicable), and in the other positions or offices of the Company or its subsidiaries or affiliates assigned to her hereunder. Notwithstanding the foregoing provisions of this section, nothing herein shall preclude Executive from participating as a non management director of the organizations listed on Schedule A hereto and the Executive may serve as a non-management director of such other business corporations (or in a like capacity in other for-profit or not-for-profit organizations) as the Board may approve, such approval not to be unreasonably withheld.
3. Compensation
(a) Base Salary. As compensation for all services to be rendered pursuant to this Agreement and as payment for the rights and interests granted by Executive hereunder, the Company shall pay or cause any of its subsidiaries to pay the Executive a base salary (the “Base Salary”) at the rate of $950,000 per annum, subject to annual review, which may be increased (but not decreased) at the discretion of the Board of Directors or Compensation Committee. All amounts of Base Salary provided for hereunder shall be payable in accordance with the regular payroll policies of the Company.
(b) Incentive Bonus Compensation. The Compensation Committee has established for the Executive the threshold, target and maximum bonus payout for the aggregate opportunities that may be awarded in respect of the Company’s 2006 fiscal year under the Company’s Senior Executive Annual Performance Plan (the “SEAPP”), and the Executive and the Company anticipate that the Compensation Committee will establish such payout opportunities for the remaining fiscal years during the Term of Employment under the SEAPP or a successor bonus plan for executives that is approved by the stockholders of the Company (the SEAPP or any such other plan, the “Bonus Plan”). The target (or equivalent) bonus payout opportunity for the Executive in respect of each Company fiscal year during the Term of Employment for which bonus targets are established for any senior executive of the Company shall be no less than the following:
(i) For 2006 : A $900,000 minimum bonus with an opportunity to earn an aggregate amount up to the following (if that aggregate amount exceeds $900,000): (A) a pro-rata bonus based on the 2006 target bonus for the Chief Financial Officer (reflecting the Executive’s 3.5 months of service as Chief Financial Officer for 2006; plus (B) a pro-rata bonus based on the 2006 target bonus of $1,800,000 for the Chief Executive Officer of the Company (reflecting the Executive’s 8.5 months of service as Chief Executive Officer for 2006); and
(ii) For 2007(and thereafter) : An annual target (or equivalent) bonus of 100% of Base Salary then in effect (the annual target (or equivalent) bonus amount, the “Target Bonus Opportunity”); provided, that Executive will also be eligible for threshold and maximum bonus amounts as established by the Compensation Committee in accordance with the Bonus Plan.
All such opportunities shall be subject to the terms and conditions of the Bonus Plan, which are incorporated herein by reference.
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4. Equity-Based Compensation . The Company shall grant the Executive annually, commencing in 2007, a number of stock options, restricted stock units, performance shares and/or other equity-based awards, as determined by the Compensation Committee, having an aggregate value of 285% of Executive’s Base Salary as of the grant date (as determined in accordance with the valuation procedures generally utilized by the Compensation Committee in making compensation decisions at the time of grant), pursuant to and in accordance with the Company’s 2003 Stock Incentive Plan or any successor plan that the Company may adopt during the Term of Employment; provided, however , that the Executive’s eligibility for and the amount of those grants are subject to the Company’s compensation policy for its senior executives generally, as determined by the Compensation Committee and the Board from time to time.
5. Benefits.
(a) Standard Benefits. During the Term of Employment, the Executive shall be entitled to participate in all employee benefit plans and programs maintained by the Company from time to time for senior executives at a level commensurate with her position, including, but not limited to, all pension, retirement, fringe benefit and welfare plans, SERP, deferred compensation plan, executive health plan, and supplemental long-term disability plan. The Executive acknowledges that participation in such programs may result in the receipt by her of additional taxable income.
(b) Expenses . The Company agrees to reimburse the Executive for all reasonable and necessary travel, business entertainment and other business out-of-pocket expenses incurred or expended by her in connection with the performance of her duties hereunder, in accordance with the Company’s policies in effect from time to time relating to such expenses, upon presentation of proper expense statements or vouchers or such other supporting information as the Company may reasonably require of the Executive.
6. Termination.
(a) Termination Upon Death or Disability . In the event of the Executive’s death or the Executive becoming Disabled (as defined in the Company’s 2003 Stock Incentive Plan or any successor plan that the Company may adopt during the Term of Employment) during the Term of Employment, Executive’s employment and this Agreement shall automatically terminate, and the Executive, or her beneficiary or legal representative, shall be entitled to:
(i) all amounts earned or accrued, but not paid, through the date of such termination (the “Accrued Obligations”);
(ii) a lump-sum cash payment equal to a pro-rata portion (the “Pro-Rata Bonus Amount”) (based on the number of days in the period prior to the date of termination) of the Target Bonus Opportunity for the year in which such termination occurs;
(iii) immediate vesting of all unvested stock options, restricted stock and restricted stock units then held by the Executive; and
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(iv) continuation of welfare benefits (including, without limitation, medical, dental, and life insurance) for the Executive and her dependents for a period of one (1) year following the termination date.
(b) Termination for Cause; Nonrenewal . The Company shall have the right, upon notice to the Executive, to terminate the Executive’s employment under this Agreement for “Cause” (as defined below), effective upon the Executive’s receipt of such notice (or such later date as shall be specified in such notice). On any such termination for Cause or on any Nonrenewal, the Company shall have no further obligations under this Agreement, except to pay the Executive the Accrued Obligations.
For purposes of this Agreement, “Cause” means a termination by reason of the Board’s good faith determination that the Executive:
(i) willfully and continually failed to substantially perform her duties with the Company (other than a failure resulting from the Executive’s incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Executive by the Board which specifically identifies the manner in which the Board believes that the Executive has not substantially performed her duties and such failure to substantially perform continues for at least fourteen (14) days, or
(ii) willfully engaged in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise, or
(iii) has otherwise materially breached this Agreement (including, but without limitation, a voluntary termination of the Executive’s employment by the Executive during the Term of Employment.
No act, or failure to act, on the Executive’s part, shall be considered “willful” unless she has acted, or failed to act, with an absence of good faith and without a reasonable belief that her action or failure to act was in the best interest of the Company. Notwithstanding the foregoing, the Executive’s employment shall not be deemed to have been terminated for Cause unless and until (1) there shall have been delivered to the Executive a copy of a written notice setting forth that the Executive was guilty of conduct set forth above and specifying the particulars thereof in detail and (2) the Executive shall have been provided with an opportunity to be heard by the Board (with the assistance of the Executive’s counsel).
(c) Termination Without Cause or Resignation for Good Reason. The Company shall have the right, upon ninety (90) days’ prior written notice given to the Executive, to terminate the Executive’s employment for any reason whatsoever (excluding for Cause (as defined above)). In addition, the Executive may terminate her employment for Good Reason as defined below. In the case of either such event of termination, the Company shall have no further obligations hereunder, except that the Executive shall be entitled to:
(i) the Accrued Obligations;
(ii) the Pro-Rata Bonus Amount;
(iii) twelve individual monthly payments which in the aggregate equal the Base Salary plus the Target Bonus Opportunity then in effect, during the one-year period immediately following the termination;
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(iv) with respect to options and stock appreciation rights then held by the Executive, the vesting of such awards shall accelerate by 12 months and the Executive’s right to exercise any rights under the instruments governing those options and stock appreciation rights shall on the later of (x) 75 days from the Executive’s date of termination, (y) December 31 of the year of Executive’s termination or (z) the earlier of (A) 365 days following the Executive’s date of termination or (B) the end of the term of the option or stock appreciation right, provided, however, that this sub proviso (z) shall only be operative to extent permitted under Section 409A and final Treasury Regulations thereunder.
(v) continuation of welfare benefits (including, without limitation, medical, dental, and life insurance) for the Executive and her dependents for a period of one (1) year following the termination date.
For purposes of this Agreement, “Good Reason” means the occurrence, without the Executive’s express written consent, of any of the following:
(i) a change in the Executive’s status, title, position or responsibilities (including reporting responsibilities) which, in the Executive’s reasonable judgment, does not represent a promotion from her status, title, position or responsibilities as in effect immediately prior thereto; the assignment to the Executive of any duties or responsibilities which, in the Executive’s reasonable judgment, are inconsistent with such status, title position or responsibilities; or any removal of the Executive from or failure to reappoint or reelect her to any of such positions, except in connection with the termination of her employment for disability, Cause, death or by the Executive other than for Good Reason;
(ii) a reduction by the Company in the Executive’s Base Salary as in effect immediately prior thereto;
(iii) the Company’s requiring the Executive to be based at any place outside a 30-mile radius from the Executive’s business office location on the date hereof, except for reasonably required travel on the Company’s business which is not materially greater than such travel requirements prior to date hereof;
(iv) the failure by the Company to continue to provide the Executive with the compensation and benefits substantially similar (in terms of benefit levels and/or reward opportunities) to those provided for under this Agreement and those provided to her under any of the employee benefit plans in which the Executive becomes a participant, or the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by her as of the date hereof; and
(v) any material breach by the Company of any provision of this Agreement.
Except as otherwise provided in this Section 6(c), the Company will have no further obligations under Sections 3, 4 and 5 hereof or otherwise. In the event of termination pursuant to this Section 6(c), the Executive shall not be required to mitigate her damages hereunder.
(d) Change in Control . Immediately upon the occurrence of any Change in Control (within the meaning of “Change in Control” set forth in the Key Executive Agreement dated November 8, 2000 between the Executive and the Company (the “Change in
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Control Agreement”)), the Change in Control Agreement will supersede this Agreement in its entirety and will govern the employment relationship between the Executive and the Company, and this Agreement will thereupon be terminated and will be of no further force or effect.
(e) Section 409A of the Code. It is the intention of the parties to this Agreement that no payment or entitlement pursuant to this Agreement will give rise to any adverse tax consequences to the Executive under Section 409A of the Code and Department of Treasury regulations and other interpretive guidance issued thereunder, including that issued after the date hereof (collectively, “Section 409A”). The Agreement shall be interpreted to that end and, consistent with that objective and notwithstanding any provision herein to the contrary, the Company may unilaterally take any action it deems necessary or desirable to amend any provision herein to avoid the application of or excise tax under Section 409A. Further, no effect shall be given to any provision herein in a manner that reasonably could be expected to give rise to adverse tax consequences under that provision. The Company shall from time to time compile a list of “specified employees” as defined in, and pursuant to, Prop. Reg. Section 1.409A-1(i) or any successor regulation. Notwithstanding any other provision herein, if the Executive is a specified employee on the date of termination, no payment of compensation under this Agreement (other than a payment that qualifies as a “short-term deferral” under Section 409A) shall be made to the Executive during the period lasting six months from the date of termination unless the Company determines that there is no reasonable basis for believing that making such payment would cause the Executive to suffer any adverse tax consequences pursuant to Section 409A of the Code. If any payment to the Executive is delayed pursuant to the immediately preceding sentence, such payment instead shall be made on the first business day following the expiration of the six-month period referred to in that sentence. The Company shall consult with the Executive in good faith regarding implementation of this section 6(e); provided that neither the Company nor its employees or representatives shall have liability to the Executive with respect thereto.
(f) Release of Claims. As a condition precedent to the receipt of payments and benefits pursuant to this Section, the Executive, or, in the case of her death or becoming Disabled that prevents the Executive from performing her obligation under this section 6(f), her personal representative, and her beneficiary, if applicable, will execute an effective general release of claims against the Company and its subsidiaries and affiliates and their respective directors, officers, employees, attorneys and agents; provided , however , that such effective release will not affect any right that the Executive, or in the event of her death, her personal representative or beneficiary, otherwise has to any payment or benefit provided for in this Agreement or to any vested benefits the Executive may have in any employee benefit plan of Company or any of its subsidiaries or affiliates, or any right the Executive has under any other agreement between the Executive and the Company or any of its subsidiaries or affiliates that expressly states that the right survives the termination of the Executive’s employment.
7. Confidentiality; Noncompetition; Ownership.
(a) The Executive shall comply with the Noncompetition Addendum attached hereto (the “Addendum”), which is an integral part of this Agreement and is incorporated herein by reference.
(b) The Executive acknowledges that all developments, including, without limitation, inventions (patentable or otherwise), discoveries, formulas, improvements, patents, trade secrets, designs, reports, computer software, flow charts and diagrams, procedures, data, documentation, ideas and writings and applications thereof relating to any business or planned business of the Company
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or any of its subsidiaries or affiliates that, alone or jointly with others, the Executive may conceive, create, make, develop, reduce to practice or acquire during the Executive’s employment with the Company or any of its subsidiaries or affiliates (collectively, the “Developments”) are works made for hire and shall remain the sole and exclusive property of the Company. The Executive hereby assigns to the Company, in consideration of the payments set forth in Section 3(a) hereof, all of her right, title and interest in and to all Developments. The Executive shall promptly and fully disclose all future material Developments to the Board and, at any time upon request and at the expense of the Company, shall execute, acknowledge and deliver to the Company all instruments that the Company shall prepare, give evidence and take all other actions that are necessary or desirable in the reasonable opinion of the Company to enable the Company to file and prosecute applications for and to acquire, maintain and enforce all letters patent and trademark registrations or copyrights covering the Developments in all countries in which the same are deemed necessary by the Company. All memoranda, notes, lists, drawings, records, files, computer tapes, programs, software, source and programming narratives and other documentation (and all copies thereof) made or compiled by the Executive or made available to the Executive concerning the Developments or otherwise concerning the business or planned business of the Company or any of its subsidiaries or affiliates shall be the property of the Company or such subsidiaries or affiliates and shall be delivered to the Company or such subsidiaries or affiliates promptly upon the expiration or termination of the Term of Employment.
(c) During the Term of Employment, the Company, its subsidiaries and affiliates shall have the exclusive right to use the Executive’s name and image throughout the world in its advertising and promotional materials in connection with the advertising and promotion of the Company, its subsidiaries and affiliates, and their products. After the expiration of the Term of Employment, the Company, it subsidiaries and affiliates shall have the non-exclusive right in perpetuity to use the Executive’s name and image throughout the world solely in connection with promotional materials related to the history of the Company, it subsidiaries and affiliates, and their products. The consideration for such rights is the payments set forth in section 3(a) hereof. The rights conveyed hereby may be assigned by the Company, its subsidiaries or affiliates to a successor in interest to the Company or the relevant subsidiary or affiliate or their businesses or product lines.
(d) This section 7 and the Addendum shall, without any limitation as to time, survive the expiration or any termination of the Executive’s employment hereunder.
8. Deductions and Withholding. The Company or its subsidiaries or affiliates, as applicable, shall withhold from any and all compensation paid to and required to be paid to the Executive pursuant to this Agreement all Federal, state, local and/or other taxes which the Company determines are required to be withheld in accordance with applicable statutes or regulations from time to time in effect and all amounts required to be deducted in respect of the Executive’s coverage under applicable employee benefit plans. For purposes of this Agreement and calculations hereunder, all such deductions and withholdings shall be deemed to have been paid to and received by the Executive.
9. Entire Agreement. Except for the agreements set forth in Schedule B attached hereto (and without limiting the effect of Section 5(a)), this Agreement embodies the entire agreement of the parties with respect to the Executive’s employment, compensation, perquisites and related items and supersedes any other prior oral or written agreements, arrangements or understandings between the Executive and the Company or any of its subsidiaries or affiliates, and any such other prior agreements, arrangements or understandings (including without limitation the retention letter agreement dated October 10, 2006 between the Executive and the Company) are hereby terminated and of no further effect. This
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Agreement may not be changed or terminated orally but only by an agreement in writing signed by the parties hereto.
10. Waiver. The waiver by the Company of a breach of any provision of this Agreement by the Executive shall not operate or be construed as a waiver of any subsequent breach by her. The waiver by the Executive of a breach of any provision of this Agreement by the Company shall not operate or be construed as a waiver of any subsequent breach by the Company.
11. Governing Law; Jurisdiction.
(a) This Agreement shall be subject to, and governed by, the laws of the State of Ohio applicable to contracts made and to be performed therein, without regard to conflict of laws principles.
(b) Any action to enforce any of the provisions of this Agreement shall be brought in a court of the State of Ohio or in a Federal court located within the Southern District of Ohio. The parties consent to the jurisdiction of such courts and to the service of process in any manner provided by Ohio law. Each party irrevocably waives any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in such court and any claim that such suit, action or proceeding brought in such court has been brought in an inconvenient forum and agrees that service of process in accordance with the foregoing sentences shall be deemed in every respect effective and valid personal service of process upon such party.
12. Assignability. The obligations of the Executive may not be delegated and, except with respect to the designation of beneficiaries in connection with any of the benefits payable to the Executive hereunder, the Executive may not, without the Company’s written consent thereto, assign, transfer, convey, pledge, encumber, hypothecate or otherwise dispose of this Agreement or any interest herein. Any such attempted delegation or disposition shall be null and void and without effect. The Company and the Executive agree that this Agreement and all of the Company’s rights and obligations hereunder may be assigned or transferred by the Company to and shall be assumed by and be binding upon any successor to the Company. Unless assumption occurs by operation of law, the Company shall require any successor by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Company would be required to perform if no such succession had taken place. The term “successor” means, with respect to the Company or any of its subsidiaries, any corporation or other business entity which, by merger, consolidation, purchase of the assets or otherwise acquires all or a majority of the operating assets or business of the Company.
13. Severability. If any provision of this Agreement or any part thereof, including, without limitation, section 7 hereof and the Addendum, as applied to either party or to any circumstances shall be adjudged by a court of competent jurisdiction to be void or unenforceable, the same shall in no way affect any other provision of this Agreement or remaining part thereof, or the validity or enforceability of this Agreement, which shall be given full effect without regard to the invalid or unenforceable part thereof.
If any court construes any of the provisions of section 7 hereof or the Addendum, or any part thereof, to be unreasonable because of the duration of such provision or the geographic scope thereof,
8
such court may reduce the duration or restrict or redefine the geographic scope of such provision and enforce such provision as so reduced, restricted or redefined.
14. Notices. All notices to the Company or the Executive permitted or required hereunder shall be in writing and shall be delivered personally, by telecopier or by courier service providing for next-day or two-day delivery or sent by registered or certified mail, return receipt requested, to the following addresses:
|
The Company: |
| Wendy’s International, Inc. |
| 4288 W. Dublin-Granville Road |
| Dublin, OH 43017 |
| Attn: General Counsel |
| Tel: (614) 764-3100 |
| Fax: (614) 764-3330 |
|
The Executive: |
|
Kerrii B. Anderson c/o Wendy’s International, Inc. |
|
4288 W. Dublin-Granville Road |
|
Dublin, OH 43017 |
|
Tel: (614) 764-XXXX |
|
Fax: (614) 459-8122 |
|
Email: XXXXXX@wendys.com |
|
With a copy to: |
|
Weil, Gotshal, & Manges LLP |
|
767 Fifth Avenue |
|
New York, NY 10153 |
|
Attn: Andrew Gaines, Esq. |
|
Tel: (212) 310-8000 |
|
Fax: (212) 310-8007 |
|
Email: andrew.gaines@weil.com |
Either party may change the address to which notices shall be sent by sending written notice of such change of address to the other party. Any such notice shall be deemed given, if delivered personally, upon receipt; if telecopied, when telecopied; if sent by courier service providing for next-day or two-day delivery, the next business day or two business days, as applicable, following deposit with such courier service; and if sent by certified or registered mail, three days after deposit (postage prepaid) with the U.S. mail service.
15. Indemnification. The Executive shall be entitled to such indemnification under the terms of the Company’s By-Laws and Articles of Incorporation and such other liability insurance as the Company may purchase for its senior officers from time to time.
18. Legal Fees . The Company shall reimburse the Executive for all legal fees and related expenses reasonably and in good faith incurred by the Executive (i) in connection with the negotiation and execution of this Agreement and/or (ii) in order to obtain or enforce any right or benefit to
9
which the Executive is entitled under this Agreement (including the costs of experts, evidence and counsel).
19. Paragraph Headings. The paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.
20. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first written above.
| WENDY’S INTERNATIONAL, INC. | ||
| By: |
/s/ Leon M. McCorkle, Jr. |
|
|
Name: Title: |
Leon M. McCorkle, Jr. EVP, General Counsel and Secretary |
|
|
/s/ Kerrii B. Anderson |
||
| Kerrii B. Anderson | ||
10
NONCOMPETITION ADDENDUM
TO
EMPLOYMENT AGREEMENT
This Noncompetition Addendum (“Addendum”) between the Executive and the Company is an attachment to the Employment Agreement (“Agreement”) between the Executive and the Company and is effective as of the effective date of the Agreement. This Addendum is an integral part of the Agreement and is incorporated therein by reference. Capitalized terms not defined herein have the meanings set forth in the Agreement.
1. In addition to any confidentiality obligation contained in the Agreement, the Executive acknowledges and agrees that in the course of the Executive’s employment with the Company, the Executive received and otherwise had access to trade secrets and other information that is confidential and/or proprietary to the Company or its affiliates and subsidiaries (collectively the “Wendy’s Brands”), including, but not limited to, information relating to strategic and other business plans, strategies processes and policies, records, recipes, menus, pricing, techniques, consumer requirements, consumer preferences, finances, operations, marketing, franchises, and business techniques and methods, organizational structures, opinions and judgments of executives (including the Executive) respecting strategic and other business plans, strategies, processes and policies and other confidential information, which information is highly valuable, special and unique to Wendy’s Brands, is maintained as confidential by Wendy’s Brands, is not available to Wendy’s Brands’ competition and/or the general public, and the disclosure of which would cause Wendy’s Brands serious competitive harm and loss of profits and goodwill (hereinafter “Confidential Information”). The Executive agrees that she shall not, at any time, directly or indirectly, use, disclose, in whole or in part, to third parties, or otherwise misappropriate Wendy’s Brands Confidential Information either while employed by the Company or at any time thereafter, except with the express written consent of the Company or unless compelled by subpoena or court order, in which case the Executive will give the Company reasonable advance notice of the information required to be provided under such court order or subpoena. All files, records, documents, information, data and similar items relating to the business of Wendy’s Brands, whether prepared by the Executive or otherwise coming into the Executive’s possession, shall remain the property of the Company and shall not be removed from the premises of the Company without the prior written consent of the Company and in any event shall be promptly delivered to the Company on the date of execution of the Agreement, or as otherwise agreed to by the Company.
2. A portion of the payments provided for in the Agreement constitute consideration to which the Executive is not or may not be otherwise entitled, and constitutes good and fair consideration for the covenants contained herein.
3. The Executive acknowledges and agrees that the Confidential Information the Executive acquired regarding Wendy’s Brands will enable the Executive to injure Wendy’s Brands if the Executive should compete with the Company. Therefore, the Executive agrees that, from the effective date of the Agreement through the first anniversary of the last payment made to the Executive pursuant to the Agreement (unless the Agreement is terminated pursuant to section 6(b) thereof, in which case the following limitations shall extend to the date that is 180 days after that anniversary (the applicable end of the limitations period, the “End Date”), Executive shall not, directly or indirectly, on her own behalf or on behalf of any third party, as an employee, officer, director, partner, employee, consultant, or in any other capacity, invest (other than investments in publicly traded companies which constitute not more than 3 % of the voting securities of any such company) or engage in any business in whatever form that is competitive with the business of the Company. This restriction includes, without limitation, any business engaged in drive through or counter food service restaurant business serving primarily hamburgers, chicken sandwiches or salads, typically referred to as “Quick Service” restaurants (such as Burger King, McDonald’s, Jack in the Box, etc.) and also includes any business engaged in real estate development for such businesses. This restriction shall not prohibit the Executive from accepting employment or otherwise becoming associated with a Wendy’s Brand franchisee, but only in connection with activities associated with the operation of a Wendy’s Brand franchise or activities that otherwise are not encompassed by the restrictions of this paragraph, subject to any confidentiality obligations contained herein. The geographical boundary for the restrictions contained herein shall be the Continent of North America.
4. The Executive agrees that, from the effective date of the Agreement through the End Date, she shall not, directly or indirectly, on her own behalf or on behalf of any third party, solicit, contact, or otherwise encourage any
11
individual then employed with Wendy’s Brands or who was employed by Wendy’s Brands within the one (1) year immediately preceding any such solicitation, contact, hiring or encouragement, to leave his or her employment with Wendy’s Brands or accept employment with any other employer or enterprise, nor shall the Executive in any manner assist any third party in any such activity. The Executive acknowledges that any attempt on the part of the Executive to induce others to leave Wendy’s Brands’ employ, or any effort by the Executive to interfere with Wendy’s Brands relationships with their other employees, would be harmful and damaging to Wendy’s Brands.
5. The Executive agrees that, from the effective date of the Agreement through the End Date, she shall not, directly or indirectly, on her own behalf or on behalf of any third party, solicit or otherwise engage in any conduct that has the purpose or effect of interfering with any business relationship or potential business relationship of Wendy’s Brands, including without limitation suppliers, franchisees, or investors, nor shall the Executive in any manner assist any third party in any such activity.
6. The Executive acknowledges and agrees that the covenants contained herein, specifically including without limitation the duration and geographical boundaries of the non-competition provisions, are reasonable and necessary to protect the goodwill, trade secrets, and other legitimate business interests of Wendy’s Brands and to protect Wendy’s Brands from unfair competition. The Executive further acknowledges and agrees that enforcement of the covenants contained herein will cause the Executive no undue hardship.
7. The Executive acknowledges and agrees that any breach or threatened breach of these covenants will cause the Company immediate and irreparable harm, for which injunctive relief would be necessary and appropriate. The Executive therefore agrees that the Company shall be entitled, without bond, to the entry of temporary and permanent injunctions, orders of specific performance, and other equitable relief issued by any court of competent jurisdiction, enforcing the covenants contained herein, without limiting any additional remedies to which the Company may be entitled. If a bond is required by statute, rule, court order, or otherwise, the Executive agrees that such bond shall be in the sum of $100.00. Further, the Executive agrees that, if a temporary injunction or restraining order is dissolved, the Executive’s only remedy under this Agreement would be its dissolution and any payment determined to be owed to her under the Agreement.
12
Schedule A
List of Existing Board of Director Relationships
Laboratory Corporation of America Holdings
Tim Hortons Inc.
(expected to resign on or about February 1, 2007)
13
Schedule B
List of Existing Agreements
Pursuant to Section 9 of the Agreement
|
Agreements with Kerrii B. Anderson |
||||||||
| November 8, 2000 | Key Executive Agreement | |||||||
| April 3, 2003 | Indemnification Agreement (Director) | |||||||
| July 7, 2005 | Indemnification Agreement (Officer) | |||||||
| October 10, 2006 | Severance Agreement (part of interim CEO terms) | |||||||
| April 22, 2004 | Restricted Stock Award Agreement | |||||||
| March 23, 2005 | Performance Share Award Agreement | |||||||
| May 1, 2005 | Restricted Stock Award Agreement | |||||||
| March 17, 2006 | Performance Share Award Agreement | |||||||
| May 1, 2006 | Restricted Stock Unit Award Agreement (not yet finalized) | |||||||
| April 29, 2002 | Stock Option Award | |||||||
| April 23, 2003 | Stock Option Award | |||||||
14
Exhibit 21
WENDY’S INTERNATIONAL, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
|
Subsidiary |
Jurisdiction of
or organization |
|||||
|
Country |
State |
|||||
|
Wendy’s Old Fashioned Hamburgers of New York, Inc. |
U.S. | Ohio | ||||
|
Wendy’s Capital Corporation |
U.S. | Virginia | ||||
|
Wendy Restaurant, Inc. |
U.S. | Delaware | ||||
|
Wendy’s of Denver, Inc. |
U.S. | Colorado | ||||
|
Wendy’s Restaurants of Canada, Inc. |
Canada | |||||
|
Wendy’s of N.E. Florida, Inc. |
U.S. | Florida | ||||
|
Wendy’s Old Fashioned Hamburger Restaurants Pty. Ltd. |
Australia | |||||
|
Wendy’s Old Fashioned Hamburgers of Guam, L.L.C. |
Guam | |||||
|
Wendserve, Inc. |
U.S. | Delaware | ||||
|
Wenark, Inc. |
U.S. | Florida | ||||
|
Wentexas, Inc |
U.S. | Texas | ||||
|
The New Bakery Co. of Ohio, Inc. |
U.S. | Ohio | ||||
|
NBCO Maintenance Corporation |
U.S. | Ohio | ||||
|
Delavest, Inc. |
U.S. | Delaware | ||||
|
Markdel, Inc. |
U.S. | Delaware | ||||
|
Findel Corp. |
U.S. | Delaware | ||||
|
BDJ 71112, LLC |
U.S. | Ohio | ||||
|
Scioto Insurance Company |
U.S. | Vermont | ||||
|
Oldemark LLC |
U.S. | Vermont | ||||
|
Restaurant Finance Corporation |
U.S. | Ohio | ||||
|
WBT GC, LLC |
U.S. | Colorado | ||||
|
The Wendy’s National Advertising Program, Inc. |
U.S. | Ohio | ||||
|
Wendy’s Canadian Advertising Program Inc. |
Canada | |||||
|
Guam Holdings, Inc. |
U.S. | Ohio | ||||
|
256 Gift Card Inc. |
U.S. | Colorado | ||||
|
Wendy’s Restaurants (Asia) Limited |
China | |||||
|
Wendy’s Limited |
England | |||||
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (File No. 333-102824) and in the Registration Statements on Form S-8 (File Nos. 33-36602, 33-36603, 33-57913, 33-61347, 333-09261, 333-32675, 333-60031, 333-60033, 333-83973, 333-42478, 333-65990, 333-97277, 333-107855, 333-107856, 333-109952, 333-114803 and 333-138004) of Wendy’s International, Inc. of our report dated March 1, 2007 relating to the financial statements, financial statement schedule, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
| PricewaterhouseCoopers LLP |
| Columbus, Ohio |
| March 1,2007 |
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS: That the undersigned officer and/or director of Wendy’s International, Inc. (the “Company”), which is about to file a Form 10-K with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, hereby constitutes and appoints Kerrii B. Anderson, Leon M. McCorkle, Jr. and Brendan P. Foley, Jr. as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K, any and all amendments and documents related thereto, and to file the same, and all exhibits thereto, and other documents relating thereto, with the Securities and Exchange Commission, and grants unto each of said attorneys-in-fact and substitute or substitutes full power and authority to do each and every act and thing requested and necessary to be done in and about the premises as fully to all intents and purposes as he or she might do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and substitute or substitutes may lawfully do and seek to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this 1st day of March, 2007.
|
/s/ KERRII B. ANDERSON |
| Kerrii B. Anderson, Chief Executive Officer and President, Director |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS: That the undersigned officer and/or director of Wendy’s International, Inc. (the “Company”), which is about to file a Form 10-K with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, hereby constitutes and appoints Kerrii B. Anderson, Leon M. McCorkle, Jr. and Brendan P. Foley, Jr. as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K, any and all amendments and documents related thereto, and to file the same, and all exhibits thereto, and other documents relating thereto, with the Securities and Exchange Commission, and grants unto each of said attorneys-in-fact and substitute or substitutes full power and authority to do each and every act and thing requested and necessary to be done in and about the premises as fully to all intents and purposes as he or she might do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and substitute or substitutes may lawfully do and seek to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this 1st day of March, 2007.
|
/s/ BRENDAN P. FOLEY, JR. |
|
Brendan P. Foley, Jr., Senior Vice President, General Controller and Assistant Secretary |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS: That the undersigned officer and/or director of Wendy’s International, Inc. (the “Company”), which is about to file a Form 10-K with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, hereby constitutes and appoints Kerrii B. Anderson, Leon M. McCorkle, Jr. and Brendan P. Foley, Jr. as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K, any and all amendments and documents related thereto, and to file the same, and all exhibits thereto, and other documents relating thereto, with the Securities and Exchange Commission, and grants unto each of said attorneys-in-fact and substitute or substitutes full power and authority to do each and every act and thing requested and necessary to be done in and about the premises as fully to all intents and purposes as he or she might do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and substitute or substitutes may lawfully do and seek to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this 1st day of March, 2007.
|
/s/ ANN B. CRANE |
| Ann B. Crane, Director |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS: That the undersigned officer and/or director of Wendy’s International, Inc. (the “Company”), which is about to file a Form 10-K with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, hereby constitutes and appoints Kerrii B. Anderson, Leon M. McCorkle, Jr. and Brendan P. Foley, Jr. as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K, any and all amendments and documents related thereto, and to file the same, and all exhibits thereto, and other documents relating thereto, with the Securities and Exchange Commission, and grants unto each of said attorneys-in-fact and substitute or substitutes full power and authority to do each and every act and thing requested and necessary to be done in and about the premises as fully to all intents and purposes as he or she might do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and substitute or substitutes may lawfully do and seek to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this 1st day of March, 2007.
|
/s/ JANET HILL |
| Janet Hill, Director |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS: That the undersigned officer and/or director of Wendy’s International, Inc. (the “Company”), which is about to file a Form 10-K with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, hereby constitutes and appoints Kerrii B. Anderson, Leon M. McCorkle, Jr. and Brendan P. Foley, Jr. as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K, any and all amendments and documents related thereto, and to file the same, and all exhibits thereto, and other documents relating thereto, with the Securities and Exchange Commission, and grants unto each of said attorneys-in-fact and substitute or substitutes full power and authority to do each and every act and thing requested and necessary to be done in and about the premises as fully to all intents and purposes as he or she might do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and substitute or substitutes may lawfully do and seek to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this 1st day of March, 2007.
|
/s/ THOMAS F. KELLER |
| Thomas F. Keller, Director |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS: That the undersigned officer and/or director of Wendy’s International, Inc. (the “Company”), which is about to file a Form 10-K with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, hereby constitutes and appoints Kerrii B. Anderson, Leon M. McCorkle, Jr. and Brendan P. Foley, Jr. as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K, any and all amendments and documents related thereto, and to file the same, and all exhibits thereto, and other documents relating thereto, with the Securities and Exchange Commission, and grants unto each of said attorneys-in-fact and substitute or substitutes full power and authority to do each and every act and thing requested and necessary to be done in and about the premises as fully to all intents and purposes as he or she might do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and substitute or substitutes may lawfully do and seek to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this 1st day of March, 2007.
|
/s/ WILLIAM E. KIRWAN |
| William E. Kirwan, Director |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS: That the undersigned officer and/or director of Wendy’s International, Inc. (the “Company”), which is about to file a Form 10-K with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, hereby constitutes and appoints Kerrii B. Anderson, Leon M. McCorkle, Jr. and Brendan P. Foley, Jr. as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K, any and all amendments and documents related thereto, and to file the same, and all exhibits thereto, and other documents relating thereto, with the Securities and Exchange Commission, and grants unto each of said attorneys-in-fact and substitute or substitutes full power and authority to do each and every act and thing requested and necessary to be done in and about the premises as fully to all intents and purposes as he or she might do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and substitute or substitutes may lawfully do and seek to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this 1st day of March, 2007.
|
/s/ DAVID P. LAUER |
| David P. Lauer, Director |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS: That the undersigned officer and/or director of Wendy’s International, Inc. (the “Company”), which is about to file a Form 10-K with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, hereby constitutes and appoints Kerrii B. Anderson, Leon M. McCorkle, Jr. and Brendan P. Foley, Jr. as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K, any and all amendments and documents related thereto, and to file the same, and all exhibits thereto, and other documents relating thereto, with the Securities and Exchange Commission, and grants unto each of said attorneys-in-fact and substitute or substitutes full power and authority to do each and every act and thing requested and necessary to be done in and about the premises as fully to all intents and purposes as he or she might do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and substitute or substitutes may lawfully do and seek to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this 1st day of March, 2007.
|
/s/ JERRY W. LEVIN |
| Jerry W. Levin, Director |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS: That the undersigned officer and/or director of Wendy’s International, Inc. (the “Company”), which is about to file a Form 10-K with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, hereby constitutes and appoints Kerrii B. Anderson, Leon M. McCorkle, Jr. and Brendan P. Foley, Jr. as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K, any and all amendments and documents related thereto, and to file the same, and all exhibits thereto, and other documents relating thereto, with the Securities and Exchange Commission, and grants unto each of said attorneys-in-fact and substitute or substitutes full power and authority to do each and every act and thing requested and necessary to be done in and about the premises as fully to all intents and purposes as he or she might do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and substitute or substitutes may lawfully do and seek to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this 1st day of March, 2007.
|
/s/ J. RANDOLPH LEWIS |
| J. Randolph Lewis, Director |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS: That the undersigned officer and/or director of Wendy’s International, Inc. (the “Company”), which is about to file a Form 10-K with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, hereby constitutes and appoints Kerrii B. Anderson, Leon M. McCorkle, Jr. and Brendan P. Foley, Jr. as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K, any and all amendments and documents related thereto, and to file the same, and all exhibits thereto, and other documents relating thereto, with the Securities and Exchange Commission, and grants unto each of said attorneys-in-fact and substitute or substitutes full power and authority to do each and every act and thing requested and necessary to be done in and about the premises as fully to all intents and purposes as he or she might do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and substitute or substitutes may lawfully do and seek to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this 1st day of March, 2007.
|
/s/ JAMES F. MILLAR |
| James F. Millar, Director |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS: That the undersigned officer and/or director of Wendy’s International, Inc. (the “Company”), which is about to file a Form 10-K with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, hereby constitutes and appoints Kerrii B. Anderson, Leon M. McCorkle, Jr. and Brendan P. Foley, Jr. as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K, any and all amendments and documents related thereto, and to file the same, and all exhibits thereto, and other documents relating thereto, with the Securities and Exchange Commission, and grants unto each of said attorneys-in-fact and substitute or substitutes full power and authority to do each and every act and thing requested and necessary to be done in and about the premises as fully to all intents and purposes as he or she might do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and substitute or substitutes may lawfully do and seek to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this 1st day of March, 2007.
|
/s/ STUART I. ORAN |
|
Stuart I. Oran, Director |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS: That the undersigned officer and/or director of Wendy’s International, Inc. (the “Company”), which is about to file a Form 10-K with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, hereby constitutes and appoints Kerrii B. Anderson, Leon M. McCorkle, Jr. and Brendan P. Foley, Jr. as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K, any and all amendments and documents related thereto, and to file the same, and all exhibits thereto, and other documents relating thereto, with the Securities and Exchange Commission, and grants unto each of said attorneys-in-fact and substitute or substitutes full power and authority to do each and every act and thing requested and necessary to be done in and about the premises as fully to all intents and purposes as he or she might do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and substitute or substitutes may lawfully do and seek to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this 1st day of March, 2007.
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/s/ JAMES V. PICKETT |
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James V. Pickett, Chairman of the Board |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS: That the undersigned officer and/or director of Wendy’s International, Inc. (the “Company”), which is about to file a Form 10-K with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, hereby constitutes and appoints Kerrii B. Anderson, Leon M. McCorkle, Jr. and Brendan P. Foley, Jr. as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K, any and all amendments and documents related thereto, and to file the same, and all exhibits thereto, and other documents relating thereto, with the Securities and Exchange Commission, and grants unto each of said attorneys-in-fact and substitute or substitutes full power and authority to do each and every act and thing requested and necessary to be done in and about the premises as fully to all intents and purposes as he or she might do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and substitute or substitutes may lawfully do and seek to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this 1st day of March, 2007.
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/s/ PETER H. ROTHSCHILD |
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Peter H. Rothschild, Director |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS: That the undersigned officer and/or director of Wendy’s International, Inc. (the “Company”), which is about to file a Form 10-K with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, hereby constitutes and appoints Kerrii B. Anderson, Leon M. McCorkle, Jr. and Brendan P. Foley, Jr. as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K, any and all amendments and documents related thereto, and to file the same, and all exhibits thereto, and other documents relating thereto, with the Securities and Exchange Commission, and grants unto each of said attorneys-in-fact and substitute or substitutes full power and authority to do each and every act and thing requested and necessary to be done in and about the premises as fully to all intents and purposes as he or she might do in person, and hereby ratifies and confirms all things that each of said attorneys-in-fact and substitute or substitutes may lawfully do and seek to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this 1st day of March, 2007.
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/s/ JOHN R. THOMPSON |
| John R. Thompson, Director |
Exhibit 31(a)
Certifications
I, Kerrii B. Anderson, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Wendy’s International, Inc.; |
| 2. | Based on my knowledge, this 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 report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this 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 report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: March 1, 2007
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/s/ KERRII B. ANDERSON |
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Name: Kerrii B. Anderson Title: Chief Executive Officer |
Exhibit 31(b)
Certifications
I, Brendan P. Foley, Jr., certify that:
| 1. | I have reviewed this annual report on Form 10-K of Wendy’s International, Inc.; |
| 2. | Based on my knowledge, this 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 report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this 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 report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: March 1, 2007
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/s/ BRENDAN P. FOLEY, JR. |
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Name: Brendan P. Foley, Jr. Title: General Controller |
Exhibit 32(a)
Certification of CEO Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
This certification is provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and accompanies the annual report on Form 10-K (the “Form 10-K”) for the year ended December 31, 2006 of Wendy’s International, Inc. (the “Issuer”).
I, Kerrii B. Anderson, the Chief Executive Officer of Issuer certify that, to the best of my knowledge:
(i) the Form 10-K fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
(ii) the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Issuer.
Dated: March 1, 2007
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/s/ KERRII B. ANDERSON |
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Name: Kerrii B. Anderson |
A signed original of this written statement required by Section 906 has been provided to Wendy’s International, Inc. and will be retained by Wendy’s International, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32(b)
Certification of General Controller Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
This certification is provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and accompanies the annual report on Form 10-K (the “Form 10-K”) for the year ended December 31, 2006 of Wendy’s International, Inc. (the “Issuer”).
I, Brendan P. Foley, Jr., the General Controller of Issuer certify that, to the best of my knowledge:
(i) the Form 10-K fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
(ii) the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Issuer.
Dated: March 1, 2007
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/s/ BRENDAN P. FOLEY, JR. |
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Name: Brendan P. Foley, Jr. |
A signed original of this written statement required by Section 906 has been provided to Wendy’s International, Inc. and will be retained by Wendy’s International, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 99
Safe Harbor Under the Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 (the “ Act ”) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. Wendy’s International, Inc. (the “ Company ”) desires to take advantage of the “safe harbor” provisions of the Act.
Certain information in this annual report on Form 10-K, particularly information regarding future economic performance and finances, and plans, expectations and objectives of management, is forward looking. 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:
Competition . The quick-service restaurant industry is intensely competitive with respect to price, service, location, personnel and type and quality of food. The Company and its franchisees compete with international, regional and local organizations primarily through the quality, variety and value perception of food products offered. The number and location of units, quality and speed of service, attractiveness of facilities, effectiveness of advertising and marketing programs, and new product development by the Company and its competitors are also important factors. The Company anticipates that intense competition will continue to focus on pricing. Certain of the Company’s competitors have substantially larger marketing budgets.
Economic, Market and Other Conditions . The quick-service restaurant industry is affected by changes in international, national, regional, and local economic conditions, consumer preferences and spending patterns, demographic trends, consumer perceptions of food safety, weather, traffic patterns, the type, number and location of competing restaurants, and the effects of war or terrorist activities and any governmental responses thereto. Factors such as inflation, food costs, labor and benefit costs, legal claims, and the availability of management and hourly employees also affect restaurant operations and administrative expenses. The ability of the Company and its franchisees to finance new restaurant development, improvements and additions to existing restaurants, and the acquisition of restaurants from, and sale of restaurants to franchisees is affected by economic conditions, including interest rates and other government policies impacting land and construction costs and the cost and availability of borrowed funds.
Importance of Locations . The success of Company and franchised restaurants is dependent in substantial part on location. There can be no assurance that current locations will continue to be attractive, as demographic patterns change. It is possible the neighborhood or economic conditions where restaurants are located could decline in the future, thus resulting in potentially reduced sales in those locations.
Government Regulation . The Company and its franchisees are subject to various federal, state, and local laws affecting their business. The development and operation of restaurants depend to a significant extent on the selection and acquisition of suitable sites, which are subject to zoning, land use, environmental, traffic, and other regulations. Restaurant operations are also subject to licensing and regulation by state and local departments relating to health, sanitation and safety standards, federal and state labor laws (including applicable minimum wage requirements, overtime, working and safety conditions, and citizenship requirements), federal and state laws which prohibit discrimination and other laws regulating the design and operation of facilities, such as the Americans with Disabilities Act of 1990. Changes in these laws and regulations, particularly increases in applicable minimum wages, may adversely affect financial results. The operation of the Company’s franchisee system is also subject to regulation enacted by a number of states and rules promulgated by the Federal Trade Commission. The Company cannot predict the effect on its operations, particularly on its relationship with franchisees, of the future enactment of additional legislation regulating the franchise relationship. The Company’s financial results could also be affected by changes in applicable accounting rules.
Growth Plans . The Company plans to increase the number of systemwide restaurants open or under construction. There can be no assurance that the Company or its franchisees will be able to achieve growth objectives or that new restaurants opened or acquired will be profitable.
The opening and success of restaurants depends on various factors, including the identification and availability of suitable and economically viable locations, sales levels at existing restaurants, the negotiation of acceptable lease or purchase terms for new locations, permitting and regulatory compliance, the ability to meet construction schedules, the financial and other development capabilities of franchisees, the ability of the Company to hire and train qualified management personnel, and general economic and business conditions.
International Operations . The Company’s business outside of the United States is subject to a number of additional factors, including international economic and political conditions, differing cultures and consumer preferences, currency regulations and fluctuations, diverse government regulations and tax systems, uncertain or differing interpretations of rights and obligations in connection with international franchise agreements and the collection of royalties from international franchisees, the availability and cost of land and construction costs, and the availability of experienced management, appropriate franchisees, and joint venture partners. Although the Company believes it has developed the support structure required for international growth, there is no assurance that such growth will occur or that international operations will be profitable.
Disposition of Restaurants . The disposition of company operated restaurants to new or existing franchisees is part of the Company’s strategy to develop the overall health of the system by acquiring restaurants from, and disposing of restaurants to, franchisees where prudent. The realization of gains from future dispositions of restaurants depends in part on the ability of the Company to complete disposition transactions on acceptable terms.
Transactions to Improve Return on Investment . The sale of real estate previously leased to franchisees is generally part of the program to improve the Company’s return on invested capital. There are various reasons why the program might be unsuccessful, including changes in economic, credit market, real estate market or other conditions, and the ability of the Company to complete sale transactions on acceptable terms and at or near the prices estimated as attainable by the Company.
Mergers, Acquisitions and Other Strategic Transactions . The Company intends to evaluate potential mergers, acquisitions, joint venture investments, alliances, vertical integration opportunities and divestitures as part of its strategic planning initiative. These transactions involve various inherent risks, including accurately assessing the value, future growth potential, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition candidates; the potential loss of key personnel of an acquired business; the Company’s ability to achieve projected economic and operating synergies; and unanticipated changes in business and economic conditions affecting an acquired business.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date thereof. The Company undertakes no obligation to publicly release any revisions to the forward-looking statements contained in this annual report on Form 10-K, or to update them to reflect events or circumstances occurring after the date of this annual report on Form 10-K, or to reflect the occurrence of unanticipated events.