<PAGE> 1
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended July 5, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
------------- -------------
Commission File Number 1-8116
WENDY'S INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Ohio 31-0785108
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 256, 4288 West Dublin-Granville Road, Dublin, Ohio 43017-0256
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 614-764-3100
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO .
--- ---
Indicate the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 9, 1998
- -------------------------------- -----------------------------
Common shares, $.10 stated value 127,248,000 shares
Exhibit index on page 16.
1 of 20
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<TABLE>
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
<CAPTION>
Pages
<S> <C> <C>
PART I: Financial Information
Item 1. Financial Statements:
Consolidated Statement of Income for the quarter and
year-to-date periods ended July 5, 1998 and June 29, 1997 3 - 4
Consolidated Condensed Balance Sheet as of July 5, 1998
and December 28, 1997 5 - 6
Consolidated Condensed Statement of Cash Flows for the
year-to-date periods ended July 5, 1998 and June 29, 1997 7
Notes to the Consolidated Financial Statements 8 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10 - 13
PART II: Other Information
Item 1 14
Item 4 14
Item 6 14
Signature 15
Index to Exhibits 16
Exhibit 99(a) - Safe Harbor under the Private Securities Litigation 17 - 18
Reform Act of 1995
Exhibit 99(b) - Press release announcing increase in share repurchase 19 - 20
program
</TABLE>
2
<PAGE> 3
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(In thousands, except per share data)
14 WEEKS ENDED 13 WEEKS ENDED
JULY 5, 1998 JUNE 29, 1997
------------ -------------
REVENUES
Retail sales ....................... $435,473 $437,374
Franchise revenues ................. 94,491 102,841
-------- --------
529,964 540,215
-------- --------
COSTS AND EXPENSES
Cost of sales ...................... 271,415 267,283
Company restaurant operating
costs ............................ 95,737 98,244
Operating costs .................... 17,961 14,870
General and administrative
expenses ......................... 46,686 38,892
Depreciation and amortization
of property and equipment ........ 24,326 24,086
Other (income) expense ............. (409) 1,355
Interest, net ...................... 735 1,256
-------- --------
456,451 445,986
-------- --------
INCOME BEFORE INCOME TAXES ............. 73,513 94,229
INCOME TAXES ........................... 27,910 37,233
-------- --------
NET INCOME ............................. $ 45,603 $ 56,996
======== ========
BASIC EARNINGS PER COMMON SHARE ........ $ .35 $ .43
======== ========
DILUTED EARNINGS PER COMMON SHARE ...... $ .34 $ .42
======== ========
DIVIDENDS PER COMMON SHARE ............. $ .06 $ .06
======== ========
BASIC SHARES ........................... 130,212 131,457
======== ========
DILUTED SHARES ......................... 139,155 140,636
======== ========
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
3
<PAGE> 4
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(In thousands, except per share data)
27 WEEKS ENDED 26 WEEKS ENDED
JULY 5, 1998 JUNE 29, 1997
------------ -------------
REVENUES
Retail sales ....................... $817,061 $823,499
Franchise revenues ................. 168,476 175,600
-------- --------
985,537 999,099
-------- --------
COSTS AND EXPENSES
Cost of sales ...................... 514,106 509,102
Company restaurant operating
costs ............................ 186,943 193,395
Operating costs .................... 32,512 28,900
General and administrative
expenses ......................... 89,854 77,366
Depreciation and amortization
of property and equipment ........ 49,080 47,940
Other (income) expense ............. (418) 4,977
Interest, net ...................... 553 2,933
-------- --------
872,630 864,613
-------- --------
INCOME BEFORE INCOME TAXES ............. 112,907 134,486
INCOME TAXES ........................... 43,470 52,853
-------- --------
NET INCOME ............................. $ 69,437 $ 81,633
======== ========
BASIC EARNINGS PER COMMON SHARE ........ $ .53 $ .62
======== ========
DILUTED EARNINGS PER COMMON SHARE ...... $ .52 $ .60
======== ========
DIVIDENDS PER COMMON SHARE ............. $ .12 $ .12
======== ========
BASIC SHARES ........................... 131,168 131,152
======== ========
DILUTED SHARES ......................... 140,054 140,345
======== ========
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
4
<PAGE> 5
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands)
JULY 5, 1998 DECEMBER 28, 1997
------------ -----------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents .......... $ 117,432 $ 234,262
Accounts receivable, net ........... 67,800 66,755
Notes receivable, net .............. 18,429 13,897
Deferred income taxes .............. 32,010 31,007
Inventories and other .............. 39,153 35,633
----------- -----------
274,824 381,554
----------- -----------
PROPERTY AND EQUIPMENT ................. 1,769,376 1,803,410
Accumulated depreciation and
amortization ..................... (535,071) (537,910)
----------- -----------
1,234,305 1,265,500
----------- -----------
NOTES RECEIVABLE, NET .................. 179,025 178,681
GOODWILL, NET .......................... 51,547 51,346
DEFERRED INCOME TAXES .................. 16,216 15,117
OTHER ASSETS ........................... 57,668 49,482
----------- -----------
$ 1,813,585 $ 1,941,680
=========== ===========
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
5
<PAGE> 6
<TABLE>
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
<CAPTION>
(In thousands)
JULY 5, 1998 DECEMBER 28, 1997
------------ -----------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ................................ $ 52,579 $ 107,157
Accrued expenses:
Salaries and wages ........................... 23,342 31,377
Taxes ........................................ 21,025 21,615
Insurance .................................... 31,986 30,899
Other ........................................ 18,893 14,415
Current portion of long-term
obligations .................................. 7,048 7,151
---------- ----------
154,873 212,614
---------- ----------
LONG-TERM OBLIGATIONS
Term debt ....................................... 205,641 205,872
Capital leases .................................. 42,240 43,891
---------- ----------
247,881 249,763
---------- ----------
DEFERRED INCOME TAXES ............................... 86,658 81,017
OTHER LONG-TERM LIABILITIES ......................... 12,979 14,052
COMMITMENTS AND CONTINGENCIES
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF WENDY'S
FINANCING I ...................................... 200,000 200,000
SHAREHOLDERS' EQUITY
Preferred stock,
Authorized: 250,000 shares
Common stock, $.10 stated value
Authorized: 200,000,000 shares
Issued: 116,620,000 and
115,946,000 shares, respectively ............ 11,662 11,595
Capital in excess of stated value ............... 364,440 353,327
Retained earnings ............................... 892,740 839,215
Translation adjustments and other ............... (23,752) (18,191)
---------- ----------
1,245,090 1,185,946
Treasury stock at cost: 5,732,000 and 129,000
shares, respectively .......................... (133,896) (1,712)
---------- ----------
1,111,194 1,184,234
---------- ----------
$1,813,585 $1,941,680
========== ==========
</TABLE>
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
6
<PAGE> 7
<TABLE>
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
(In thousands)
27 WEEKS ENDED 26 WEEKS ENDED
JULY 5, 1998 JUNE 29, 1997
------------ -------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING
ACTIVITIES ...................................... $ 81,140 $ 121,283
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from asset dispositions ................ 46,416 51,354
Capital expenditures ............................ (106,151) (144,313)
Acquisition of franchises ....................... (4,807) (307)
Payments on notes receivable .................... 13,439 3,980
Other investing activities ...................... (4,664) (3,778)
--------- ---------
Net cash used in investing activities ......... (55,767) (93,064)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock .......... 9,126 22,068
Repurchase of common shares ..................... (132,184) --
Principal payments on long-term
obligations ................................... (3,335) (2,819)
Dividends paid on common stock .................. (15,810) (15,757)
--------- ---------
Net cash (used in) provided by financing
activities .................................. (142,203) 3,492
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ................................... (116,830) 31,711
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD ........................................ 234,262 218,956
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......... $ 117,432 $ 250,667
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid ................................... $ 14,599 $ 14,023
Capitalized lease obligations incurred .......... 1,391 1,251
Notes receivable from restaurant dispositions ... 9,813 16,270
Income taxes paid ............................... 35,372 20,394
Acquisition of franchises:
Fair value of assets acquired, net ............ 4,887 307
Cash paid ..................................... 4,807 307
Liabilities assumed ........................... 80 --
</TABLE>
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
7
<PAGE> 8
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. MANAGEMENT'S STATEMENT
- -------------------------------
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (all of which are normal and recurring
in nature) necessary to present fairly the financial position of Wendy's
International, Inc. and Subsidiaries (the Company) at July 5, 1998 and
December 28, 1997 and the results of operations, cash flows and
comprehensive income (see Note 4) for the 14 and 27 weeks ended July 5,
1998 and 13 and 26 weeks ended June 29, 1997. The Notes to the Consolidated
Financial Statements which are contained in the 1997 Form 10-K should be
read in conjunction with these Consolidated Financial Statements.
NOTE 2. ACQUISITIONS AND DISPOSITIONS
- --------------------------------------
In the first quarter of 1998 and 1997, two restaurants were franchised for
a net pretax gain of $266,000 and 36 restaurants for a net pretax gain of
$6.7 million, respectively.
In the second quarter of 1998 and 1997, 117 Wendy's restaurants were
franchised for a net pretax gain of $2.2 million and 81 restaurants for a
net pretax gain of $26.4 million, respectively.
In the first quarter of 1997, the Company acquired 31 Rax restaurants in
Ohio and West Virginia for conversion to Wendy's and Tim Hortons (Hortons)
restaurants. The purchase price was $8.9 million.
NOTE 3. NET INCOME PER SHARE
- -----------------------------
Basic earnings per common share is computed by dividing net income
available to common shareholders by the weighted average number of common
shares outstanding during each period. Diluted computations include
dilutive common share equivalents and assumed conversion of
company-obligated mandatorily redeemable preferred securities and the
elimination of related expenses, net of income taxes.
The computations of basic and diluted earnings per common share are shown
below:
<TABLE>
<CAPTION>
14 WEEKS 13 WEEKS 27 WEEKS 26 WEEKS
ENDED ENDED ENDED ENDED
JULY 5, 1998 JUNE 29, 1997 JULY 5, 1998 JUNE 29, 1997
------------ ------------- ------------ -------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Income for computation of basic earnings
per share................................... $ 45,603 $ 56,996 $ 69,437 $ 81,633
Interest savings (net of taxes) on assumed
conversions................................. 1,652 1,539 3,187 3,091
-------- -------- -------- --------
Income for computation of diluted
earnings per share.......................... $ 47,255 $ 58,535 $ 72,624 $ 84,724
======== ======== ======== ========
Weighted average shares for computation
of basic earnings per share................. 130,212 131,457 131,168 131,152
Incremental shares on assumed issuance
and repurchase of stock options............. 1,370 1,606 1,313 1,620
Assumed conversions........................... 7,573 7,573 7,573 7,573
-------- -------- -------- --------
Weighted average shares for computation
of diluted earnings per share............... 139,155 140,636 140,054 140,345
======== ======== ======== ========
Basic earnings per share...................... $ .35 $ .43 $ .53 $ .62
======== ======== ======== ========
Diluted earnings per share.................... $ .34 $ .42 $ .52 $ .60
======== ======== ======== ========
</TABLE>
8
<PAGE> 9
NOTE 4. STATEMENT OF COMPREHENSIVE INCOME
- ------------------------------------------
Effective December 29, 1997, the Company adopted Statement of Financial
Accounting Standards Number 130 (SFAS 130), "Reporting Comprehensive Income".
SFAS 130 requires that changes in the amounts of certain items, including
foreign currency translation adjustments, be shown in the financial statements.
The components of other comprehensive income and total comprehensive income are
shown below:
<TABLE>
<CAPTION>
14 WEEKS ENDED 13 WEEKS ENDED
JULY 5, 1998 JUNE 29, 1997
------------ -------------
(In thousands)
<S> <C> <C>
Net income ........................................... $45,603 $56,996
Other comprehensive income:
Translation adjustments (net of taxes of $6,092
and $337, respectively) ............................ (9,570) 430
Other (net of taxes of $150 and $159, respectively) .. 188 200
------- -------
Total other comprehensive income ................... (9,382) 630
------- -------
Comprehensive income ................................. $36,221 $57,626
======= =======
</TABLE>
<TABLE>
<CAPTION>
27 WEEKS ENDED 26 WEEKS ENDED
JULY 5, 1998 JUNE 29, 1997
------------ -------------
(In thousands)
<S> <C> <C>
Net income ........................................... $69,437 $81,633
Other comprehensive income:
Translation adjustments (net of taxes of $3,642
and $866, respectively) ............................ (5,818) (1,337)
Other (net of taxes of $205 and $6, respectively) .... 257 (7)
------- -------
Total other comprehensive income ................... (5,561) (1,344)
------- -------
Comprehensive income ................................. $63,876 $80,289
======= =======
</TABLE>
NOTE 5. SUBSEQUENT EVENT
- -------------------------
On August 17, 1998, the company's Board of Directors approved an increase in its
share repurchase program by up to an additional $150 million of its outstanding
common shares over the next two years. This is in addition to the program
announced in February to repurchase up to $200 million of common shares as part
of an integrated set of strategic initiatives. After the $150 million repurchase
program has been completed, the company intends to purchase shares each year in
an amount to offset the dilutive effect of employee stock options.
9
<PAGE> 10
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
The Company recorded net income of $45.6 million and diluted earnings per common
share of $.34 in the second quarter of 1998. In accordance with the previously
announced strategy of reducing gains from franchising Wendy's restaurants, the
current quarter includes $2.2 million of pretax gains. In contrast, the second
quarter of 1997 included $26.4 million in pretax gains. Net income for the
second quarter of 1998 decreased 20.0% from 1997, but improved 7.9% when asset
gains are excluded from both years. Diluted earnings per common share decreased
19.0% ($.34 versus $.42) from last year, but increased 10.0% ($.33 versus $.30)
when asset gains are excluded from both years. The current quarter includes 14
weeks of operations in 1998 versus 13 weeks in 1997.
The year-to-date comparison showed net income of $69.4 million and diluted
earnings per common share of $.52 for 1998 and net income of $81.6 million and
diluted earnings per common share of $.60 for 1997. Year-to-date pretax gains
from franchising Wendy's restaurants totaled $2.4 million and $33.1 million for
1998 and 1997, respectively. Year-to-date diluted earnings per common share
without asset gains increased 10.9% to $.51 for 1998 versus $.46 for 1997. The
year-to-date results include 27 weeks of operations in 1998 versus 26 in 1997.
In the fourth quarter 1997, the Company identified 64 underperforming
restaurants to close and identified another 18 restaurants to franchise, and
provided a charge for the disposition of these assets. Sixty of the stores
identified for closure have been closed and eight have been franchised. The
Company repurchased 5.6 million shares during 1998 at a cost of $132.2 million
and intends to purchase up to a total of $200 million by the year 2000. Salad
bars have been removed from substantially all of the company operated domestic
Wendy's identified for removal. All reserves established in the fourth quarter
1997 are expected to be adequate for the ultimate disposition of the related
assets.
RETAIL SALES
- ------------
Average net sales increased 2.3% for the second quarter and 3.1% year-to-date in
Wendy's domestic company restaurants. The increase in 1998 average sales was the
result of the initiatives to close and franchise selected underperforming
restaurants. Sales from the Tim Hortons (Hortons) warehouse increased 14% in the
second quarter and 21% year-to-date as the system continues to develop new
stores combined with an average same store sales increase of 10.2% for the
second quarter and 11.5% year-to-date. Total retail sales decreased for the
second quarter and year-to-date however, reflecting the company domestic Wendy's
restaurants franchised and closed in the past year partly offset by one
additional week of operations in the current year. Domestic selling prices
increased .9% in the second quarter and year-to-date 1998.
Average net sales per domestic Wendy's restaurant, adjusted to eliminate the
impact of the extra week, for the quarter and year-to-date periods ended July 5,
1998 and June 29, 1997 were as follows:
<TABLE>
Second Quarter Year-to-Date
-------------- ------------
<CAPTION>
% %
Increase Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
---- ---- ---------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Company $298,900 $292,150 2.3 $567,500 $550,200 3.1
Franchise 264,650 270,300 (2.1) 503,250 505,150 (.4)
Total Domestic 272,150 276,100 (1.4) 517,700 517,250 .1
</TABLE>
10
<PAGE> 11
The number of systemwide restaurants open as of July 5, 1998 and June 29, 1997
was as follows:
1998 1997
---- ----
Company ................. 1,048 1,242
Franchise ............... 4,183 3,809
----- -----
Total Wendy's ........... 5,231 5,051
===== =====
Total Hortons ........... 1,585 1,442
===== =====
COST OF SALES AND RESTAURANT OPERATING COSTS
- --------------------------------------------
The domestic Wendy's company operating margin decreased in the second quarter
1998 to 16.6% versus 17.2% for 1997. Year-to-date, the domestic Wendy's
operating margin decreased to 15.0% from 15.2%. Wendy's domestic restaurant
operating costs, as a percent of retail sales, increased over 1997 for both the
quarter and year-to-date, primarily reflecting increased group insurance and
higher rent expense.
Domestic Wendy's cost of sales, as a percent of sales, increased .2% in the
second quarter and .1% year-to-date 1998 over 1997 reflecting higher average
wage rates partly offset by lower food and paper costs. Hortons warehouse cost
of sales remained relatively constant as a percent of warehouse sales and total
costs of sales increased in line with retail sales.
FRANCHISE REVENUES
- ------------------
Gains from franchising Wendy's restaurants were reduced from the sale of 81
restaurants for a pretax gain of $26.4 million in the second quarter 1997 to
$2.2 million in pretax gains for 117 restaurants in 1998. Year-to-date, 119
Wendy's restaurants were franchised for a gain of $2.4 million in 1998 versus
117 Wendy's restaurants franchised for a gain of $33.1 million in 1997. Rental
income for the quarter increased $6.8 million over 1997 and $12.2 million
year-to-date as a result of more Wendy's and Hortons franchise leased properties
and one additional week of operations in 1998.
Royalties, before reserve provisions, increased $6.4 million in the second
quarter 1998 over 1997 and $10.9 million year-to-date. This was primarily a
result of an increase of 308 Wendy's domestic average franchise restaurants open
for the quarter and 311 for the year-to-date period as well as one additional
week of operations in 1998. Year-to-date franchise reserves recorded were
$561,000 for 1998 and $1.0 million for 1997.
GENERAL AND ADMINISTRATIVE EXPENSES
- -----------------------------------
General and administrative expenses for the second quarter of 1998 were 8.8% of
total revenues versus 7.2% in 1997. Year-to-date 1998 general and administrative
expenses were 9.1% versus 7.7% in 1997. The higher percentage for both the
quarter and year-to-date reflects the revenue reduction from franchising and
closing Wendy's company restaurants. The increase also reflects spending to
expand Hortons in Canada and the U.S and technology initiatives. Total dollar
increases in 1998 also reflect one additional week of operations.
OTHER (INCOME) EXPENSE
- ----------------------
Other expense decreased $1.8 million in the second quarter 1998 from 1997 and
$5.4 million year-to-date, primarily as a result of a $1.5 million charge taken
in 1997 for an arbitration decision relating to international operations and
decreases in expenses for store closures and asset write-offs related to
restaurant remodeling and conversion activity.
INCOME TAXES
- ------------
The effective tax rate decreased to 38.0% in the second quarter 1998 from 39.5%
in 1997 and decreased to 38.5% for the year-to-date 1998 from 39.3% in 1997,
reflecting the tax effects of restructuring to provide for continuing growth at
Tim Hortons.
11
<PAGE> 12
FINANCIAL CONDITION
-------------------
The Company's financial condition remains solid at the end of the second quarter
of 1998. The debt to equity and debt to total capitalization ratios were 22% and
18%, respectively, at July 5, 1998. During the year, cash of $132.2 million was
used to repurchase 5.6 million shares. In addition, capital expenditures
amounted to $106.2 million for 1998 compared with $144.3 million for 1997.
OUTLOOK
-------
The Company continues to employ its strategies as outlined in the Company's
most recent Form 10-K. As was expected, competition in the quick-service
restaurant industry has been intense and is expected to remain so in the
future. The Company faced an extremely competitive environment, including
widespread discounting in domestic markets and higher domestic labor rates.
These conditions may continue in the short-term. The Company expects some
produce cost pressures during the third quarter. Emphasis continues to be on
solid restaurant operations, new products, effective marketing, new restaurant
development and the overall financial health of the entire system. The Company
believes that its success depends on providing quality products and everyday
value, not in discounting products.
The Company anticipates that up to 575 new Wendy's and Hortons restaurants
will be opened systemwide (both company and franchise) during 1998, subject to
the continued ability of the Company and its franchisees to obtain suitable
locations and financing for new restaurant development. Year-to-date 1998,
there were 195 new restaurants opened. Cash flow from operations, cash and
investments on hand, existing revolving credit agreements and possible asset
sales should adequately provide for projected cash requirements. If additional
cash is needed for future acquisitions of restaurants from franchisees,
repurchase of common shares, or for other corporate purposes, the Company
believes it would be able to obtain additional cash through potential bank
borrowing or the issuance of securities.
YEAR 2000
---------
The Company has completed an assessment of year 2000 compliance. The year 2000
issue concerns the ability of date sensitive software to properly recognize the
year 2000 in calculating and processing computer system information. The Company
has initiated a plan to install a new enterprise-wide information system and a
new store management system, which will include new software that is year 2000
compliant. The Company has made an assessment that some existing software will
need to be modified since it will not be replaced by the new information
systems. The modification is expected to cost $3 million to $4 million, of which
$1 million was expensed in 1997 and $800,000 has been expensed year-to-date in
1998. The remainder will be expensed over the next 18 months. The new
information systems are estimated to cost approximately $70 million to $80
million, a substantial portion of which will be capitalized. Both internal
resources along with third party consultants are being utilized to identify,
correct and test these systems for year 2000 compliance. Of the systems
converted approximately 50% have been tested and put into production. It is
expected that substantially all testing will be completed by the end of 1998.
The Company anticipates timely completion of these projects which should
mitigate the year 2000 issue. However, if the new information systems are not
implemented on a timely basis and if modifications to existing systems can not
be accomplished on a timely basis, there would be adverse financial and
operational effects on the Company. The amount of these effects can not be
ascertained at this time.
The company is currently assessing the year 2000 compliance efforts of its
franchisees and suppliers.
12
<PAGE> 13
RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------
In June 1997, Financial Accounting Standard Number 131 - "Disclosures about
Segments of an Enterprise and Related Information" was issued. This statement
provides information about operating segments in annual financial statements and
requires selected information about operating segments in interim financial
reports. It also requires certain related disclosures about products and
services, geographic areas and major customers. This statement is effective for
the year ending January 3, 1999. The Company is in the process of evaluating the
impact of this statement.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 (SOP 98-1), "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use". The statement is effective for
fiscal years beginning after December 15, 1998. The statement defines which
costs of computer software developed or obtained for internal use are capital
and which costs are expense. The Company is currently following the provisions
of this statement.
In February 1998, the Financial Accounting Standards Board issued Financial
Accounting Standard Number 132-"Employers' Disclosure about Pensions and Other
Postretirement Benefits", which revises employers' disclosures about pension and
other postretirement benefit plans. It does not change the measurement or
recognition of those plans. The statement is effective for fiscal years
beginning after December 15, 1997. The adoption of this statement will have no
impact on reported net income per common share.
In June 1998, Financial Accounting Standard Number 133 - "Accounting for
Derivative Instruments and Hedging Activities" was issued. The statement is
effective for all quarters of fiscal years beginning after June 15, 1999. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires recognition of all
derivatives as either assets or liabilities in the financial statements at fair
value. The Company is in the process of evaluating the impact of this statement.
SAFE HARBOR STATEMENT
---------------------
Certain information contained in this Form 10-Q, particularly information
regarding future economic performance and finances, plans and objectives of
management, is forward looking. In some cases, information regarding certain
important factors that could cause actual results to differ materially from any
such forward-looking statement appear 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; consumer
perceptions of food safety; harsh weather, particularly in the first and fourth
quarters; changes in consumer tastes; labor and benefit costs; legal claims;
risks inherent to international development; 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; and other factors set forth in Exhibit
99 attached hereto.
13
<PAGE> 14
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.
As previously reported by the Company, on June 9, 1997, Arthur L. Wilson,
individually and purportedly on behalf of a putative class of other persons
similarly situated, filed a complaint against the Company in the U.S. District
Court for the Southern District of Mississippi. The complaint alleges that the
Company has engaged in racial discrimination in violation of Title VII and 42
U.S.C. Section 1981. The plaintiff seeks judgment in an undetermined amount
against the Company for punitive and compensatory damages (including benefits)
as well as injunctive and equitable relief. Discovery is presently underway.
After the plaintiff's motion to add five additional plaintiffs was denied, a
second complaint was filed in the same court on July 13, 1998. The second
complaint is brought by the five plaintiffs both individually and purportedly on
behalf of a putative class of other persons similarly situated. The allegations
in the second complaint are substantially similar to those in the Wilson action.
The Company intends to defend both actions vigorously, and believes that it has
meritorious defenses to the claims sought to be asserted and that the resolution
of the actions will not materially affect the Company's results of operations,
liquidity or financial condition. This case was last referenced in the Company's
Form 10-K for the year ended December 28, 1997.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of the company's shareholders was held on April 29, 1998.
(b) The following table sets forth the name of each director elected at the
meeting and the number of votes for or withheld from each director.
Director For Withheld
-------- --- --------
R. David Thomas 106,221,795 10,042,296
Ernest S. Hayeck 106,173,524 10,090,570
Janet Hill 106,217,634 10,046,456
True H. Knowles 106,204,431 10,059,661
Paul D. House 106,228,040 10,036,052
The following directors did not stand for reelection at the meeting (the year in
which each director's term expires is indicated in parenthesis):
Thekla R. Shackelford (1999), Ronald E. Musick (1999), W. Clay Hamner (1999),
Gordon F. Teter (1999), Frederick R. Reed (1999), Fielden B. Nutter, Sr. (2000),
James V. Pickett (2000), Thomas F. Keller (2000), Ronald V. Joyce (2000) and
Andrew G. McCaughey (2000).
(c) The following table sets forth the brief description of each other matter
voted on the Annual Meeting and the number of votes cast for, against or
abstaining from, as well as broker nonvotes on, each matter.
<TABLE>
<CAPTION>
Broker
For Against Abstain Nonvotes
--- ------- ------- --------
<S> <C> <C> <C> <C>
Ratify Coopers & Lybrand L.L.P.
as independent public accountants
of the company 99,159,659 16,706,990 397,423 None
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Index to Exhibits on Page 16.
(b) No report on Form 8-K was filed during the quarter ended July 5, 1998.
14
<PAGE> 15
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WENDY'S INTERNATIONAL, INC.
---------------------------
(Registrant)
Date: 08/18/98 /s/ Frederick R. Reed
---------- --------------------------------
Frederick R. Reed
Chief Financial Officer, General
Counsel and Secretary
15
<PAGE> 16
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit
Number Description Page No.
------ ----------- --------
99(a) Safe Harbor Under 17-18
the Private Securities
Litigation Reform Act of 1995
99(b) Press release 19-20
announcing increase in
share repurchase program
16
<PAGE> 1
Exhibit 99(a)
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
EXHIBIT 99(a)
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 Form 10-Q, 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 national, regional, and local economic conditions,
consumer preferences and spending patterns, demographic trends, consumer
perceptions of food safety, weather, traffic patterns and the type, number and
location of competing restaurants. 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.
<PAGE> 2
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.
Growth Plans. The Company plans to significantly increase the number of
systemwide Wendy's and Tim Hortons 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 strategy to develop the
overall health of the system by acquiring restaurants from, and disposing of
restaurants to, franchisees where prudent. The expectation of gains from future
dispositions of restaurants depends in part on the ability of the Company to
complete disposition transactions on acceptable terms.
The non-recurring charge recorded in the fourth quarter of 1997 included $35
million related to the closure or sale of restaurants to franchisees and the
disposition of surplus properties. The actual loss incurred from these
activities could vary significantly from the Company's estimate due to many of
the factors set forth above.
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 Form 10-Q, or to update them to reflect events or circumstances occurring
after the date this Form 10-Q was first furnished to shareholders, or to reflect
the occurrence of unanticipated events.
<PAGE> 1
EXHIBIT 99(b)
WENDY'S INTERNATIONAL, INC.
ANNOUNCES UP TO $150 MILLION INCREASE
IN SHARE REPURCHASE PROGRAM
DUBLIN, Ohio (Aug. 18, 1998) - Wendy's International, Inc. (NYSE: WEN)
today announced an increase in its share repurchase program by up to an
additional $150 million of its outstanding common shares over the next two
years. This is in addition to the program announced in February to repurchase up
to $200 million of Wendy's shares as part of an integrated set of strategic
initiatives.
"We expect to fund the additional $150 million of share repurchases by
redeploying assets that are earning less than our cost of capital, such as notes
receivable from franchisees, certain properties leased to franchisees, certain
restaurants that will be refranchised and excess cash," said Chief Financial
Officer Frederick R. Reed. "Furthermore, we intend to purchase shares after the
$150 million addition is completed to offset dilution from employee stock
options."
Through the end of the second quarter, Wendy's had repurchased 5.6
million of its shares for $132 million. At the end of the second quarter the
company had $117 million of cash and cash equivalents.
"We aggressively purchased shares in the first half of the year and we
believe that Wendy's current share price is attractive," said Chairman, CEO and
President Gordon F. Teter. "The announcement to expand the repurchase program
represents a continuation of our strategic initiatives intended to improve
shareholder value and we are pleased that we have made excellent progress on the
initiatives to date." The strategic initiatives include:
o Closing 64 underperforming Wendy's units (written down in the 1997
fourth quarter). Thus far 60 have been closed.
o Refranchising of about 160 Wendy's units, many of which were producing
returns below the system average. At the end of the second quarter, 117
units had been sold to franchisees, and the remaining transactions are
expected to be completed in the third quarter. Pretax gains realized
during 1998 as a result of refranchising restaurants are expected to be
less than $15 million, as compared to $81 million in 1997.
o Improving returns on the remaining company operated Wendy's restaurants
by focusing on margin improvements. Salad bars have been removed from
<PAGE> 2
most company units, and a number of other projects are under way that
will also reduce costs and improve margins.
o Accelerating new restaurant development. The company plans to increase
systemwide development by 15% next year.
o Repurchasing shares. The February announcement specified a repurchase
of up to $200 million of Wendy's common shares using available cash.
Teter stressed that the company intends to continue its long-term
strategies of focusing on restaurant operations, aggressive but responsible
growth, balanced marketing and maintaining a performance driven culture. "This
strategy has produced the best top-line sales growth in the industry," he said.
Wendy's strong sales performance has continued in the third quarter.
Average unit volumes for domestic company operated Wendy's restaurants were up
more than 8% compared to last year. The average unit volume comparison was
favorably impacted by the closing and refranchising of company operated stores.
Same-store sales for domestic company operated Wendy's restaurants were up 3.2%
for the month of July. Same-store sales at Tim Hortons' restaurants in Canada
were up 10.7% in July.
The Company's long-term goal is to deliver core EPS growth in the low-
to mid-teens.
Wendy's International, Inc. is one of the world's largest restaurant
operating and franchising companies with $6.0 billion in systemwide sales in
1997. Wendy's Old Fashioned Hamburgers, founded by Dave Thomas in 1969, is the
third largest quick-service hamburger restaurant chain in the world, with 5,207
units in 34 countries and territories. The Company also owns Tim Hortons, the
largest coffee and donut restaurant chain in Canada, with 1,578 total units at
year-end.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and consolidated statement of income and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> MAR-30-1998
<PERIOD-END> JUL-05-1998
<CASH> 117,432
<SECURITIES> 0
<RECEIVABLES> 86,229
<ALLOWANCES> 0
<INVENTORY> 39,153
<CURRENT-ASSETS> 274,824
<PP&E> 1,769,376
<DEPRECIATION> 535,071
<TOTAL-ASSETS> 1,813,585
<CURRENT-LIABILITIES> 154,873
<BONDS> 405,641
0
0
<COMMON> 11,662
<OTHER-SE> 1,099,532
<TOTAL-LIABILITY-AND-EQUITY> 1,813,585
<SALES> 435,473
<TOTAL-REVENUES> 529,964
<CGS> 271,415
<TOTAL-COSTS> 385,113
<OTHER-EXPENSES> 70,603
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 735
<INCOME-PRETAX> 73,513
<INCOME-TAX> 27,910
<INCOME-CONTINUING> 45,603
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,603
<EPS-PRIMARY> .35
<EPS-DILUTED> .34
</TABLE>
