<PAGE> 1
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 4, 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 November 6, 1998
-------------------------------- -------------------------------
Common shares, $.10 stated value 124,447,000 shares
Exhibit index on page 18.
1 of 32
<PAGE> 2
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
PART I: Financial Information
Item 1. Financial Statements:
Consolidated Condensed Statement of Income for the quarter and
year-to-date periods ended October 4, 1998 and
September 28, 1997 3-4
Consolidated Condensed Balance Sheet as of October 4, 1998
and December 28, 1997 5-6
Consolidated Condensed Statement of Cash Flows for the
year-to-date periods ended October 4, 1998 and
September 28, 1997 7
Notes to the Consolidated Condensed Financial Statements 8-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10-15
PART II: Other Information
Item 1 16
Item 6 16
Signature 17
Index to Exhibits 18
Exhibit 2 19-23
Exhibit 10 24-29
Exhibit 99 30-32
</TABLE>
2
<PAGE> 3
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share data)
QUARTER ENDED QUARTER ENDED
OCTOBER 4, 1998 SEPTEMBER 28, 1997
--------------- ------------------
<S> <C> <C>
REVENUES
Retail sales............................. $388,881 $425,186
Franchise revenues....................... 96,294 100,315
-------- --------
485,175 525,501
-------- --------
COSTS AND EXPENSES
Cost of sales............................ 241,756 263,654
Company restaurant operating
costs.................................. 88,319 100,457
Operating costs.......................... 14,516 14,602
General and administrative
expenses............................... 46,578 39,566
Depreciation and amortization
of property and equipment.............. 23,267 23,666
Other expense............................ 19 906
Interest, net............................ 908 593
-------- --------
415,363 443,444
-------- --------
INCOME BEFORE INCOME TAXES................. 69,812 82,057
INCOME TAXES............................... 26,877 29,089
-------- -------
NET INCOME................................. $ 42,935 $ 52,968
======== ========
BASIC EARNINGS PER COMMON SHARE............ $.34 $.40
==== ====
DILUTED EARNINGS PER COMMON SHARE.......... $.33 $.39
==== ====
DIVIDENDS PER COMMON SHARE ................ $.06 $.06
==== ====
BASIC SHARES............................... 126,567 131,882
======= =======
DILUTED SHARES............................. 135,182 141,191
======= =======
</TABLE>
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
3
<PAGE> 4
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share data)
40 WEEKS ENDED 39 WEEKS ENDED
OCTOBER 4, 1998 SEPTEMBER 28, 1997
--------------- ------------------
<S> <C> <C>
REVENUES
Retail sales............................. $1,205,942 $1,248,685
Franchise revenues....................... 264,770 275,915
---------- ----------
1,470,712 1,524,600
---------- ----------
COSTS AND EXPENSES
Cost of sales............................ 755,862 772,756
Company restaurant operating
costs.................................. 275,262 293,852
Operating costs.......................... 47,028 43,502
General and administrative
expenses............................... 136,432 116,932
Depreciation and amortization
of property and equipment.............. 72,347 71,606
Other (income) expense................... (399) 5,883
Interest, net............................ 1,461 3,526
---------- ----------
1,287,993 1,308,057
---------- ----------
INCOME BEFORE INCOME TAXES................. 182,719 216,543
INCOME TAXES............................... 70,347 81,942
---------- ----------
NET INCOME................................. $ 112,372 $ 134,601
========== ==========
BASIC EARNINGS PER COMMON SHARE............ $.87 $1.02
==== =====
DILUTED EARNINGS PER COMMON SHARE.......... $.85 $.99
==== ====
DIVIDENDS PER COMMON SHARE ................ $.18 $.18
==== ====
BASIC SHARES............................... 129,673 131,395
======= =======
DILUTED SHARES............................. 138,471 140,627
======= =======
</TABLE>
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
4
<PAGE> 5
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
(In thousands)
OCTOBER 4, 1998 DECEMBER 28, 1997
--------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............... $ 102,492 $ 234,262
Accounts receivable, net................ 69,579 66,755
Notes receivable, net................... 30,476 13,897
Deferred income taxes................... 30,011 31,007
Inventories and other................... 35,317 35,633
---------- ----------
267,875 381,554
---------- ----------
PROPERTY AND EQUIPMENT.................... 1,751,103 1,803,410
Accumulated depreciation and
amortization........................... (522,696) (537,910)
---------- ----------
1,228,407 1,265,500
---------- ----------
NOTES RECEIVABLE, NET..................... 171,760 178,681
GOODWILL, NET............................. 50,812 51,346
DEFERRED INCOME TAXES..................... 14,323 15,117
OTHER ASSETS.............................. 61,504 49,482
---------- ----------
$1,794,681 $1,941,680
========== ==========
</TABLE>
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
5
<PAGE> 6
<TABLE>
<CAPTION>
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(In thousands)
OCTOBER 4, 1998 DECEMBER 28, 1997
--------------- -----------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable....................... $ 57,940 $ 107,157
Accrued expenses:
Salaries and wages................... 29,784 31,377
Taxes................................ 21,026 21,615
Insurance............................ 32,782 30,899
Other................................ 40,859 14,415
Current portion of long-term
obligations.......................... 5,798 7,151
---------- ----------
188,189 212,614
---------- ----------
LONG-TERM OBLIGATIONS
Term debt.............................. 205,548 205,872
Capital leases......................... 40,370 43,891
---------- -------
245,918 249,763
---------- ----------
DEFERRED INCOME TAXES.................... 72,125 81,017
OTHER LONG-TERM LIABILITIES.............. 13,101 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
Common and Exchangeable Issued:
133,240,000 and 132,396,000 shares,
respectively......................... 11,679 11,595
Capital in excess of stated value...... 367,395 353,327
Retained earnings...................... 928,146 839,215
Translation adjustments and other...... (32,360) (18,191)
---------- ----------
1,274,860 1,185,946
Treasury stock at cost: 8,784,000 and
129,000 shares, respectively......... (199,512) (1,712)
---------- ----------
1,075,348 1,184,234
---------- ----------
$1,794,681 $1,941,680
========== ==========
</TABLE>
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
6
<PAGE> 7
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
40 WEEKS ENDED 39 WEEKS ENDED
OCTOBER 4, 1998 SEPTEMBER 28, 1997
--------------- -----------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING
ACTIVITIES .............................. $ 156,396 $ 168,293
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from asset dispositions......... 76,715 64,594
Capital expenditures..................... (161,465) (215,257)
Acquisition of franchises................ (4,827) (6,841)
Payments on notes receivable............. 21,520 4,987
Other investing activities............... (6,246) (5,754)
--------- ---------
Net cash used in investing activities.. (74,303) (158,271)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock... 11,766 28,677
Repurchase of common and exchangeable
shares................................. (197,800) -
Principal payments on long-term
obligations............................ (4,384) (7,600)
Dividends paid on common and
exchangeable shares.................... (23,445) (23,663)
--------- ---------
Net cash used in financing activities.. (213,863) (2,586)
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS............................ (131,770) 7,436
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD................................. 234,262 218,956
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD. $ 102,492 $ 226,392
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid.......................... $ 18,684 $ 17,267
Capitalized lease obligations incurred. 3,418 2,316
Notes receivable from restaurant
dispositions......................... 9,813 44,918
Income taxes paid...................... 51,025 54,099
Acquisition of franchises:
Fair value of assets acquired, net..... 4,907 19,106
Cash paid.............................. 4,827 6,841
Liabilities assumed.................... 80 12,265
</TABLE>
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
7
<PAGE> 8
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. MANAGEMENT'S STATEMENT
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (all of which are normal and recurring
in nature) necessary to present fairly the condensed financial position of
Wendy's International, Inc. and Subsidiaries (the Company) as of October 4,
1998 and December 28, 1997 and the condensed results of operations, cash
flows and comprehensive income (see Note 4) for the quarter and 40 weeks
ended October 4, 1998 and quarter and 39 weeks ended September 28, 1997,
respectively. The Notes to the Consolidated Condensed Financial Statements
which are contained in the 1997 Form 10-K should be read in conjunction
with these Consolidated Condensed 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 were franchised 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 were franchised for a net pretax gain of
$26.4 million, respectively. In the third quarter of 1998 and 1997, 43
Wendy's restaurants were franchised for a net pretax gain of $166,000 and
56 restaurants were franchised for a net pretax gain of $21.8 million,
respectively.
In the second quarter of 1998, 35 rental properties were sold for $21.1
million, resulting in a pretax gain of $2.2 million. In the third quarter
of 1998, 41 rental properties were sold for $33.2 million, resulting in a
pretax gain of $11.1 million.
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. In the third quarter of
1997, the Company acquired 25 restaurants in the Salt Lake City area from
an existing franchise owner at a purchase price of $6.6 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.
8
<PAGE> 9
The computations of basic and diluted earnings per common share are shown
below:
<TABLE>
<CAPTION>
QUARTER QUARTER 40 WEEKS 39 WEEKS
ENDED ENDED ENDED ENDED
OCTOBER 4, SEPTEMBER 28, OCTOBER 4, SEPTEMBER 28,
1998 1997 1998 1997
------- ------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Income for computation of basic earnings
per share................................... $42,935 $52,968 $112,372 $134,601
Interest savings (net of taxes) on assumed
conversions................................. 1,612 1,539 4,799 4,617
------- ------- -------- --------
Income for computation of diluted
earnings per share.......................... $44,547 $54,507 $117,171 $139,218
======= ======= ======== ========
Weighted average shares for computation
of basic earnings per share................. 126,567 131,882 129,673 131,395
Incremental shares on assumed exercise
of stock options............................ 1,042 1,736 1,225 1,659
Assumed conversions........................... 7,573 7,573 7,573 7,573
------- ------- -------- --------
Weighted average shares for computation
of diluted earnings per share............... 135,182 141,191 138,471 140,627
======= ======= ======== ========
Basic earnings per share...................... $.34 $.40 $.87 $1.02
==== ==== ==== =====
Diluted earnings per share.................... $.33 $.39 $.85 $.99
==== ==== ==== ====
</TABLE>
NOTE 4. CONSOLIDATED CONDENSED 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 (expense) and total comprehensive
income (expense) are shown below:
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
OCTOBER 4, 1998 SEPTEMBER 28, 1997
--------------- ------------------
(In thousands)
<S> <C> <C>
Net income.................................................. $42,935 $52,968
Other comprehensive expense:
Translation adjustments (net of taxes of $4,974
and $205, respectively)................................... (7,946) (426)
Other (net of taxes of $528 and $115, respectively)......... (662) (145)
--------------- ------------------
Total other comprehensive expense ........................ (8,608) (571)
--------------- ------------------
Comprehensive income........................................ $34,327 $52,397
=============== ==================
40 WEEKS ENDED 39 WEEKS ENDED
OCTOBER 4, 1998 SEPTEMBER 28, 1997
--------------- ------------------
(In thousands)
<S> <C> <C>
Net income.................................................. $112,372 $134,601
Other comprehensive expense:
Translation adjustments (net of taxes of $8,616
and $1,071, respectively)................................. (13,764) (1,763)
Other (net of taxes of $323 and $121, respectively)......... (405) (152)
--------------- ------------------
Total other comprehensive expense ........................ (14,169) (1,915)
--------------- ------------------
Comprehensive income........................................ $98,203 $132,686
=============== ==================
</TABLE>
9
<PAGE> 10
NOTE 5. RELATED PARTY TRANSACTION
During the third quarter, the Company purchased one million exchangeable shares
of WENTIM, LTD., a subsidiary of the Company, from Ronald V. Joyce. Mr. Joyce
is a director of the Company. The exchangeable shares were exchangeable into
one million common shares of the Company. The cash purchase price for the
transaction was $21.21 per share. The closing price for a common share of the
Company on the date of purchase was $21.375. Mr. Joyce continues to own 15.45
million exchangeable shares of WENTIM, LTD.
10
<PAGE> 11
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
In the third quarter of 1998, the Company's net income was $42.9 million, and
diluted earnings per common share (EPS) were $.33. The Company recorded net
income of $53.0 million and diluted EPS of $.39 in the third quarter 1997. There
were significant non-operating benefits to 1997 results including $21.8 million
in pretax gains from franchising company operated restaurants and a nonrecurring
tax benefit from writing off certain foreign investments for tax purposes which
resulted in a 3.1% lower income tax rate. In 1998, 41 rental properties were
disposed of, resulting in an $11.1 million pretax gain. Average restaurant sales
increased in 1998 for both Wendy's and Hortons restaurants, and the domestic
Wendy's operating margin improved from 15.0% to 16.4%.
Year-to-date, the Company earned net income of $112.4 million and diluted EPS of
$.85 in 1998, compared with net income of $134.6 million and diluted EPS of $.99
in 1997. The pretax gains from franchising Wendy's company operated restaurants
were $52.3 million higher in 1997. In 1998, pretax gains on disposition of
rental properties increased $12.5 million, average sales in Wendy's and Hortons
restaurants increased and the Wendy's domestic operating margin was .4% higher.
The year-to-date 1998 results include 40 weeks of operations versus 39 weeks 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. Substantially all of
these stores have been closed or franchised. Salad bars identified for removal
have been removed from substantially all of the company operated domestic
Wendy's. Reserves established in the fourth quarter 1997 are expected to be
adequate for the ultimate disposition of the related assets. The Company
repurchased 8.7 million shares during 1998 at a cost of $197.8 million and
intends to repurchase up to a total of $350 million by the year 2000.
RETAIL SALES
- ------------
Average restaurant sales increased 7.8% for the third quarter and 4.5%
year-to-date in Wendy's domestic company restaurants. The increase in 1998
average sales was enhanced by the initiatives to close or franchise selected
underperforming restaurants. Average same store sales in Wendy's domestic
company restaurants increased approximately 2.9% in the third quarter. Sales
from the Hortons warehouse increased 13% in the third quarter 1998 and 23%
year-to-date as the Hortons' system continues to develop new stores combined
with an average same store sales increase of 9.3% for the third quarter 1998 and
10.7% year-to-date. Total retail sales decreased for the third quarter and
year-to-date, however, reflecting the company domestic Wendy's restaurants
franchised or closed in the past year. For the year-to-date period, this was
partly offset by one additional week of operations in the current year. Domestic
selling prices increased .7% in the third quarter and increased .8% year-to-date
1998.
Average net sales per domestic Wendy's restaurant for the quarter and
year-to-date periods ended October 4, 1998 and September 28, 1997 were as
follows:
<TABLE>
<CAPTION>
Third Quarter Year-to-Date
---------------------- -----------------------
% %
1998 1997 Increase 1998* 1997 Increase
---- ---- -------- ----- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Company $310,550 $288,000 7.8 $875,650 $837,850 4.5
Franchise 270,350 265,100 2.0 770,800 770,600 -
Total Domestic 278,450 270,900 2.8 793,550 788,350 0.7
</TABLE>
*1998 year-to-date numbers have been adjusted to eliminate the impact of the
extra week.
11
<PAGE> 12
The number of systemwide restaurants open as of October 4, 1998 and September
28, 1997 was as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Company............................... 1,021 1,232
Franchise............................. 4,245 3,901
----- -----
Total Wendy's......................... 5,266 5,133
===== =====
Total Hortons......................... 1,598 1,493
===== =====
</TABLE>
COST OF SALES AND RESTAURANT OPERATING COSTS
- --------------------------------------------
The domestic Wendy's company operating margin increased in the third quarter
1998 to 16.4% versus 15.0% for 1997. Year-to-date, the domestic Wendy's
operating margin increased to 15.5% in 1998 from 15.1% in 1997. Wendy's domestic
restaurant operating costs, as a percent of retail sales, decreased over 1997
for the quarter, primarily reflecting lower utility and advertising costs and
the leverage benefit of higher average sales.
Domestic Wendy's cost of sales, as a percent of sales, decreased .7% in the
third quarter and .2% year-to-date 1998 over 1997 reflecting selling price
increases, lower food and paper costs and the impact from salad bar removals,
partly offset by approximately 6% higher average wage rates. 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
- ------------------
Franchise revenues were reduced in the third quarter and year-to-date 1998
periods reflecting the lower gains from franchising company operated Wendy's
restaurants. In the third quarter and year-to-date 1998 periods, 43 and 162
restaurants were franchised for pretax gains of $166,000 and $2.6 million,
respectively. In 1997, there were 56 and 173 restaurants franchised for pretax
gains of $21.8 million and $54.9 million, respectively. Most of the reduction in
refranchising gains was offset by higher rental income, royalties and the sale
of rental property in the third quarter 1998. During the quarter, pretax gains
realized from franchisees purchasing properties previously leased amounted to
$11.1 million in 1998 and $290,000 in 1997. Year-to-date, these pretax gains
amounted to $13.1 million in 1998 and $628,000 in 1997. Rental income for the
quarter increased $4.9 million over 1997 and $14.2 million year-to-date as a
result of more Wendy's and Hortons franchise leased properties and one
additional week of operations in the 1998 year-to-date results.
Royalties, before reserve provisions, increased $4.5 million in the third
quarter 1998 over 1997 and $12.4 million for the year-to-date 1998 versus 1997.
This was primarily a result of an increase of 316 Wendy's domestic average
franchise restaurants open for the quarter and 312 for the year-to-date period
as well as one additional week of operations in the year-to-date 1998. Average
sales of Wendy's domestic franchise restaurants increased 2.0% in the third
quarter over 1997 and were equal to 1997 for the year-to-date period.
Year-to-date franchise reserves provided were $758,000 for 1998 and $1.0 million
for 1997.
GENERAL AND ADMINISTRATIVE EXPENSES
- -----------------------------------
General and administrative expenses for the third quarter of 1998 were 9.6% of
total revenues versus 7.5% in 1997. Year-to-date 1998 general and administrative
expenses were 9.3% of total revenues versus 7.7% in 1997. The higher percentage
for both the quarter and year-to-date periods reflects the reduction in domestic
retail sales as a result of stores franchised and closed in the past year. The
higher percentage also reflects the increase in professional fees primarily
related to "year 2000" compliance and other technology enhancements, and in the
year-to-date, spending to support Hortons expansion in the U.S. Total dollar
increases in year-to-date 1998 also reflect one additional week of operations.
The increase also reflects reductions in environmental and franchise reserves
and a lower bonus expense in 1997.
OTHER (INCOME) EXPENSE
- ----------------------
Other expense decreased $887,000 in the third quarter 1998 from 1997 and $6.3
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
12
<PAGE> 13
decreases in expenses for store closures and asset write-offs related to
restaurant remodeling and conversion activity in 1997.
INCOME TAXES
- ------------
The effective tax rate increased to 38.5% in the third quarter 1998 from 35.4%
in 1997 and increased to 38.5% for the year-to-date 1998 from 37.8% in 1997,
reflecting the nonrecurring tax benefit from deducting certain foreign
investments for tax purposes in the third quarter of 1997, net of the tax
effects of restructuring to provide for continuing growth at Hortons.
COMPREHENSIVE INCOME
--------------------
Decreases in other comprehensive income were primarily due to the unfavorable
changes in the value of the Canadian dollar compared with the U.S. dollar, in
the third quarter and year-to-date periods (See Note 4).
FINANCIAL CONDITION
-------------------
The Company's financial condition remains solid at the end of the third quarter
of 1998. The debt to equity and debt to total capitalization ratios were 23% and
19%, respectively, at October 4, 1998. The Company has initiated a program to
attempt to maximize return on assets over the long term by redeploying assets to
areas that have higher potential returns. In the fourth quarter of 1997, the
Company identified underperforming restaurants, substantially all of which were
to be closed or franchised in 1998. Salad bars were removed from substantially
all of the company operated restaurants identified for removal. Progress has
been made in implementing information technology systems in 1998. In addition,
99 rental properties were sold during 1998 for $68.8 million. Overall, assets
have been reduced $147 million in the current year, and the Company plans on
continuing the strategy of redeploying assets. The Company has entered into an
agreement with a third party lender that permits such lender to contact the
Company's franchisees having notes payable to the Company. The lender may offer
to refinance such notes, generally on terms more favorable to the franchisees
than existing terms, and enter into commitments to refinance such notes on or
before March 31, 1999. The Company expects a substantial portion of the notes to
be refinanced. In addition to receiving principal and interest as notes are
refinanced, the Company will also be paid a fee by the lender. Capital generated
is expected to be used for such programs as share repurchase, new restaurant
development and potential acquisitions. During the year, cash of $197.8 million
was used to repurchase 8.7 million shares. Capital expenditures amounted to
$161.5 million for 1998 compared with $215.3 million for 1997.
OUTLOOK
-------
The Company continues to employ its operating 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. 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 currently anticipates that 460 to 500 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. The
restaurant development estimate has been reduced from prior projections
reflecting difficulties in opening restaurants in some international markets
and some delays in domestic openings. Year-to-date 1998, there were 285 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 borrowings or the
issuance of securities.
13
<PAGE> 14
YEAR 2000
---------
The year 2000 issue concerns the ability of date sensitive information
technology systems and non-information technology systems with embedded
technology applications to properly recognize the year 2000 in calculating and
processing information. The Company has undertaken several actions to identify
potential issues, set priorities, develop and implement remediation plans, test
and develop and, to the extent needed, implement contingency plans.
The Company has completed an assessment of year 2000 issues with respect to what
it has identified as significant priorities. The Company has initiated a plan to
install a new enterprise-wide information system which will include new software
that is year 2000 compliant. This system is expected to be implemented during
1999. The Company has implemented a plan to remediate existing store management
systems. These systems are expected to be fully implemented during 1999. The
Company has made an assessment that other existing software will need to be
modified since it will either not be replaced by the new information systems or
replacement will not occur prior to year 2000. Internal resources and third
party consultants are being utilized to identify, correct and test these systems
for year 2000 compliance. Of the systems modified, approximately 64% have been
tested and put into production. It is expected that substantially all testing of
those systems will be completed by the end of the second fiscal quarter of 1999.
The Company is currently addressing potential year 2000 issues on lower priority
systems, and expects that substantially all of these systems will be year 2000
compliant by the end of 1999.
The modifications to existing software are expected to cost $3 million to $4
million, of which $1 million was expensed in 1997 and $1.2 million has been
expensed year-to-date in 1998. The remainder will be expensed in the fourth
quarter of fiscal 1998 and fiscal 1999. The new information system is estimated
to cost approximately $50 million to $60 million, a substantial portion of which
will be capitalized. All costs are expected to be funded by cash flows from
operations.
The Company has initiated communications with various third parties with which
it has a significant relationship to determine their readiness with respect to
the year 2000 issue. These third parties include food and paper suppliers,
restaurant equipment suppliers and banks. Based on responses received from most
of these third parties, it appears that year 2000 issues are being addressed.
The Company intends to pursue responses from the remaining third parties with
which it has a significant relationship and to discuss any material year 2000
concerns that are identified. The Company intends to develop contingency plans
by mid 1999 for third parties that the Company believes have material year 2000
concerns.
The Company has also been communicating with its franchisees regarding the
potential business risks associated with the year 2000 issue. Among other
things, these communications encouraged franchisees to address year 2000 issues
and provided information that could be useful in assessing potential year 2000
issues. The Company intends to continue providing information to franchisees
with respect to such issues.
The Company anticipates timely completion of its program to address year 2000
issues. However, if the new information systems are not implemented on a timely
basis, modifications to existing systems cannot be accomplished on a timely
basis, information technology resources do not remain available, or other
unanticipated events occur, there would be adverse financial and operational
effects on the Company. The amount of these effects cannot be ascertained at
this time. The Company has contingency plans in place for certain of these
eventualities and intends to develop other contingency plans as needed.
Although the Company has not been informed of material year 2000 issues by third
parties with which it has a material relationship or franchisees, there is no
assurance that these entities will be year 2000 compliant on a timely basis.
Unanticipated failures or significant delays in furnishing products or services
by third parties or general public infrastructure service providers, or the
inability of franchisees to perform sales reporting and financial management
functions or to make timely payments to the Company or suppliers, could have a
material adverse effect on results of operations, financial condition and/or
liquidity. The Company has contingency plans in place for certain of these
eventualities (such as the ability to shift quickly to other food suppliers in
the event one supplier experiences unanticipated year 2000 issues) and, to the
extent possible, intends to develop other contingency plans as needed.
14
<PAGE> 15
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 has determined it primarily
operates in three segments: Domestic Wendy's, International Wendy's and Hortons.
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; the ability of the Company to
successfully complete transactions designed to improve its return on investment;
unanticipated issues related to year 2000 compliance efforts of the Company or
various third parties; and other factors set forth in Exhibit 99 attached
hereto.
15
<PAGE> 16
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. 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's motion to dismiss the class
claims in the Wilson action was granted, as was the Company's motion for summary
judgment on the plaintiff's claims that the Company was the "employer" of
employees of its franchisees. The Company has tentatively settled both of these
actions, subject to court approval and the satisfaction of certain other
conditions. If all conditions are satisfied, 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-Q
for the quarter ended July 5, 1998.
On October 22, 1998, Theldon Branch, individually and purportedly on behalf of a
putative class similarly situated, filed a complaint against the Company in the
U.S. District Court for the Southern District of Texas. The complaint alleges
that the Company discriminates in its dealings with some of its African-American
franchisees. The plaintiff seeks equitable relief and $150 million in
compensatory and punitive damages. The Company is in a position to defend this
action vigorously, and believes that it has meritorious defenses to the claims
sought to be asserted and that the resolution of the action will not materially
affect the Company's results of operations, liquidity or financial condition.
Item 6. Exhibits and reports on Form 8-K.
(a) Index to Exhibits on Page 18.
(b) No report on Form 8-K was filed during the quarter ended October 4, 1998
16
<PAGE> 17
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WENDY'S INTERNATIONAL, INC.
---------------------------
(Registrant)
Date: 11/18/98 /s/ Frederick R. Reed
-------- -----------------------
Frederick R. Reed
Chief Financial Officer
and Secretary
17
<PAGE> 18
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Page No.
------- --------------------------------- --------
<S> <C> <C>
2 Agreement between 19-23
Ronald V. Joyce,
WENTIM, LTD. (a subsidiary
of the Company), the Company
and the Irrevocable Trust for the
Benefit of Ronald V. Joyce
10 Employment Agreement 24-29
between The TDL Group Co.
(a subsidiary of the Company),
Ronald V. Joyce and
the Company
99 Safe Harbor Under 30-32
the Private Securities
Litigation Reform Act of 1995
</TABLE>
18
<PAGE> 1
WENDY'S INTERNATIONAL, INC AND SUBSIDIARIES
EXHIBIT 2
AGREEMENT
This Agreement is made this 16th day of September, 1998, by and between
Ronald Vaughan Joyce ("Transferor"), WENTIM, LTD., an Ontario corporation,
having its principal office at 874 Sinclair Road, Oakville, Ontario L6K 2Y1,
Canada ("Wentim"), Wendy's International, Inc., an Ohio corporation having its
principal office at 4288 West Dublin-Granville Road, Dublin, Ohio 43017
("Wendy's"), and the Irrevocable Trust for the Benefit of Ronald V. Joyce
established under agreement dated as of December 29, 1995 ("Trust").
WHEREAS, The Huntington Trust Company, N.A., was merged with and into
The Huntington National Bank on July 1, 1997, and, The Huntington National Bank,
as the successor by merger, is the trustee of the Trust; and
WHEREAS, Transferor currently holds 16,450,000 exchangeable shares of
Wentim, which is the successor by amalgamation to 1149658 Ontario, Inc. and
632687 Alberta Ltd.; and
WHEREAS, Wendy's, Transferor, 1149658 Ontario Inc. and 632687 Alberta
Ltd. entered into a Share Purchase Agreement dated October 31, 1995, at which
time the parties had not contemplated a sale of exchangeable shares for cash;
and
WHEREAS, Wendy's, Transferor and 1149658 Ontario Inc. entered into a
Share Exchange Agreement dated as of December 29, 1995, at which time the
parties had not contemplated a sale of exchangeable shares for cash; and
WHEREAS, Transferor and Trust entered into a Guaranty Agreement dated as
of December 29, 1995, at which time the parties had not contemplated a sale of
exchangeable shares for cash; and
WHEREAS, Trust and Wendy's entered into a Subscription Agreement dated
as of December 29, 1995, at which time the parties had not contemplated a sale
of exchangeable shares for cash; and
WHEREAS, Transferor has initiated this transaction to sell 1,000,000 of
his exchangeable shares of Wentim for cash; and
WHEREAS, Wendy's desires to purchase, or to have one of its wholly owned
direct or indirect subsidiaries as Wendy's shall designate purchase (Wendy's or
such purchasing subsidiary "Transferee"), such shares from Transferor on the
terms and subject to the conditions set forth below.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
SECTION ONE. SALE OF STOCK. Transferor hereby sells and Transferee
hereby buys or causes to be bought 1,000,000 exchangeable shares of Wentim
effective on the date of this Agreement (the "transaction date"). On the
settlement date, as hereafter fixed, Transferor shall deliver such exchangeable
shares to Transferee and Transferee shall pay or cause to be paid to Transferor
the purchase price as defined herein. The purchase price per exchangeable share
shall be the Canadian dollar equivalent of the closing price of a common share
of Wendy's on the transaction date as published in the Wall Street Journal,
Midwest Edition, reduced by three-quarters of one percent (0.75%), provided,
however, that the purchase price shall not exceed the average of the closing
prices of a common share of Wendy's as published in the Wall Street Journal,
Midwest Edition, on the twenty trading days immediately preceding the
transaction date. The Canadian dollar equivalent shall be determined using the
conversion rate which applied to Canadian dollars purchased by Wendy's on the
business day before the settlement date in accordance with Wendy's normal cash
management practices. Notwithstanding the foregoing, the Transferor may
unilaterally elect in writing to the Transferee, which writing must be received
no later than 4:00 p.m. Eastern Daylight Savings Time two business
19
<PAGE> 2
days prior to the settlement date, to receive the purchase price in United
States dollars rather than the Canadian equivalent thereof. The parties hereby
agree that the purchase price is the fair market value of the applicable
exchangeable shares of Wentim.
SECTION TWO. SETTLEMENT. Settlement of the sale of the exchangeable
shares shall take place three business days after the transaction date.
Transferor shall deliver a duly endorsed certificate for 1,000,000 exchangeable
shares of Wentim to Wendy's at 4288 West Dublin-Granville Road, Dublin, Ohio
43017 in sufficient time on the settlement date to permit Wendy's to deliver
such shares to the Transferee and to permit Transferee to cause the purchase
price to be transferred by wire to the account designated by the Transferor in
writing. For purposes of this Agreement, a business day shall be each day on
which American Stock Transfer and Trust Company is open for business.
SECTION THREE. REPRESENTATIONS, WARRANTIES AND COVENANTS OF TRANSFEROR.
Transferor hereby represents and warrants that he is the sole record and
beneficial owner and holder of the exchangeable shares of Wentim being sold
pursuant to this Agreement and covenants that he has not, and as of the
settlement date will not have, pledged, transferred, sold or otherwise
hypothecated any interest in such exchangeable shares which are being sold
pursuant to this Agreement. The Transferor delivers herewith a Certificate in
the form of Schedule A which will survive settlement.
SECTION FOUR. AMENDMENT TO THE SHARE PURCHASE AGREEMENT. Pursuant to
Section 8.5 of the Share Purchase Agreement and effective concurrently with the
execution of this Agreement, Section 4.3(b) of the Share Purchase Agreement
shall be amended to read as follows:
Seller agrees that Seller will not sell, dispose of, mortgage, pledge,
charge, grant a security interest in, or otherwise transfer the
Exchangeable Shares or any part thereof, except for an exchange of such
Exchangeable Shares for Wendy's Common Shares pursuant to Newco's
Articles of Incorporation or the Share Exchange Agreement and except for
a transfer to Wendy's (or to a wholly owned direct or indirect
subsidiary of Wendy's designated by Wendy's) or a transfer to the
Trustee under the Guaranty and the Trust Agreement.
SECTION FIVE. AMENDMENT TO THE SHARE EXCHANGE AGREEMENT. Pursuant to
Section 8.2 of the Share Exchange Agreement and effective concurrently with the
execution of this Agreement, Section 6.3 of the Share Exchange Agreement shall
be amended to read as follows:
TRANSFER BY SELLER. Seller shall not transfer (other than to Wendy's, a
wholly owned direct or indirect subsidiary of Wendy's designated by
Wendy's, or the Escrow Agent) all or any portion of Seller's Newco
Exchangeable Shares, except to the Trustee under the Trust Agreement
pursuant to the terms of the Guaranty and the Trust Agreement.
SECTION SIX. AMENDMENT TO THE GUARANTY AGREEMENT. Pursuant to Section
7 of the Guaranty Agreement and effective concurrently with the execution of
this Agreement, Section 2 of the Guaranty Agreement shall be amended to read as
follows:
In addition to any other restrictions that may apply from time to time
to the Newco Exchangeable Shares and Wendy's Common Shares, SHAREHOLDER
may transfer (other than to ISSUER) all or any portion of SHAREHOLDER's
Newco Exchangeable Shares and Wendy's Common Shares only in accordance
with Section 4.3 of the Purchase Agreement and Sections 5.6 and 6.3 of
the Share Exchange Agreement, as amended.
SECTION SEVEN. AMENDMENT TO THE SUBSCRIPTION AGREEMENT. Effective
concurrently with the execution of this Agreement, Section 1(A) of the
Subscription Agreement shall be amended by adding the following:
and (iv) the number equal to the Specified Number (as of the date of
such purchase or transfer) multiplied by the number of Newco
Exchangeable Shares purchased by Wendy's (or its designated wholly owned
direct or indirect subsidiary) or transferred to Wendy's (or its
designated wholly owned direct or indirect subsidiary).
20
<PAGE> 3
SECTION EIGHT. SETTLEMENT PROCESS TO OBLIGATIONS OF ACQUIRING
CORPORATION. The obligations of Transferee is subject only to the delivery by
Transferor of one or more certificates representing all of the exchangeable
shares of Wentim which are being sold, duly endorsed for transfer.
SECTION NINE. NOTICES. All notices required or permitted to be given
under this Agreement shall be deemed duly given when delivered personally or by
telefax or sent by registered or certified mail, postage prepaid, properly
addressed to the party to receive such notice, at the addresses specified above.
SECTION TEN. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties; there are no agreements, covenants, warranties,
or representations, express or implied, except those expressly set forth in this
Agreement. All agreements, covenants, representations, and warranties contained
in this Agreement shall apply as of the transaction date and shall survive the
settlement of this Agreement.
SECTION ELEVEN. MODIFICATION. This Agreement may not be amended or
modified, except by written agreement of the parties.
SECTION TWELVE. BINDING EFFECT. This Agreement shall bind and inure to
the benefit of the parties and their heirs, legal representatives, successors,
and assigns.
SECTION THIRTEEN. GOVERNING LAW. This Agreement shall be construed
under and governed by the laws of the State of Ohio.
SECTION FOURTEEN. COUNTERPARTS. This Agreement may be executed in one
or more counterparts each of which shall be deemed to be a duplicate original,
but all of which, taken together, shall be deemed to constitute a single
instrument.
SECTION FIFTEEN. FURTHER ASSURANCES. The parties will take, or cause to
be taken, such further actions which are necessary to complete the transfer of
the exchangeable shares being sold pursuant to this Agreement on the records of
Wentim. Transferor will receive a new certificate for the balance of the
exchangeable shares which will continue to be owned by Transferee after giving
effect to the sale transaction contemplated by this Agreement.
{The remainder of this page has intentionally been left blank}
21
<PAGE> 4
IN WITNESS WHEREOF, this Agreement has been executed by the
parties or their duly authorized officers on the date first written above.
/s/ Tim Armstrong /s/ Ronald V. Joyce
- --------------------------- ---------------------------
Witness to the signature of Ronald Vaughan Joyce
Ronald Vaughan Joyce
WENTIM, LTD.
By: /s/ Gordon F. Teter
-----------------------
Gordon F. Teter
Chairman of the Board
Title: Chief Executive Officer
--------------------
WENDY'S INTERNATIONAL, INC.
By: /s/ Gordon F. Teter
-----------------------
Gordon F. Teter
Chairman of the Board
Title: CEO and President
--------------------
The Huntington National Bank, successor by merger to The Huntington Trust
Company, N.A., as trustee of the Irrevocable Trust for the Benefit of Ronald V.
Joyce, hereby executes this Agreement for the purpose of agreeing in writing to
the amendments to the Guaranty Agreement and Subscription Agreement as herein
set forth.
THE IRREVOCABLE TRUST FOR THE BENEFIT
OF RONALD V. JOYCE
The Huntington National Bank,
successor by merger to
The Huntington Trust Company, N.A.,
Trustee
By: /s/ Donna L. Shutek
-----------------------
Title: Vice President
--------------------
22
<PAGE> 5
Schedule A
CERTIFICATE
Ronald Vaughan Joyce ("Transferor") hereby represents and warrants that
he is the sole record and beneficial owner and holder of the exchangeable shares
of Wentim being sold pursuant to the Agreement dated September 16, 1998
("Agreement"), and that he has not pledged, transferred, sold or otherwise
hypothecated any interest in such exchangeable shares which are being sold
pursuant to this Agreement.
Transferor hereby further represents, warrants and covenants that, as of
September 21, 1998, he will be the sole record and beneficial owner and holder
of the exchangeable shares of Wentim being sold pursuant to the Agreement and
that he will not have pledged, transferred, sold or otherwise hypothecated any
interest in such exchangeable shares which are being sold pursuant to this
Agreement.
/s/ Tim Armstrong /s/ Ronald Vaughan Joyce
- --------------------------- ---------------------------
Witness to the signature of Ronald Vaughan Joyce
Ronald Vaughan Joyce
23
<PAGE> 1
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
EXHIBIT 10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made the 20th day of October, 1998, by and between
THE TDL GROUP CO., an unlimited liability company organized under the laws of
Nova Scotia (the "Company"), and RONALD VAUGHAN JOYCE (the "Executive") and
WENDY'S INTERNATIONAL, INC. ("Wendy's").
WHEREAS, the Company wishes to ensure the availability of the Executive's
services for itself and for those of its affiliates which franchise, develop,
lease, sublease and/or operate Tim Hortons retail outlets both in Canada and the
United States (collectively the "TDL Group").
WHEREAS, the Company and the Executive wish to set forth the terms and
conditions of the Executive's employment by the Company and Wendy's is a party
hereto solely for the purposes of section 5;
NOW, THEREFORE, in consideration of the mutual covenants contained herein, and
other good and valuable consideration, receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
2. Employment
----------
The Company agrees to employ the Executive for the Term specified in
section 2, and the Executive agrees to accept such employment, upon the
terms and conditions hereinafter set forth.
2. Term
----
Subject to the terms and conditions of this Employment Agreement, this
Employment Agreement shall be for a term commencing on the date hereof
and expiring on the close of business on June 30, 2003.
3. Duties and Responsibilities
---------------------------
(a) During the Term, the Executive shall act in an advisory role
and shall generally promote the overall health and best
interests of the TDL Group both in Canada and the United
States and in connection therewith shall perform such
executive and managerial duties and responsibilities as may be
mutually agreed upon from time to time with the Chairman, the
President or the Board of Directors of the Company. The
Executive specifically agrees to offer advice about the
acquisition, development, leasing and subleasing of real
estate, to offer advice about the operation of Tim Hortons
outlets, to participate at meetings and teleconferences and to
review budgets, when called upon to do so by the Company.
24
<PAGE> 2
(b) The Executive will, at all times, use all reasonable efforts
to perform his duties and responsibilities within the
parameters of the then current budget of the Company as
approved by the Board of Directors of the Company (except as
otherwise permitted by the Board of Directors) and will abide
by the policies of the TDL Group and of Wendy's and all
reasonable requests of the senior management of the Company,
Wendy's and of the Board of Directors of the Company. The
Executive shall comply and use all reasonable efforts to
ensure that the TDL Group complies on a timely basis with all
budgetary, approval and reporting requirements reasonably
requested by the TDL Group or Wendy's. In no event will the
Executive incur obligations on behalf of the TDL Group or
enter into any transaction on behalf of the TDL Group except
in accordance with the policies and internal controls of
Wendy's and the TDL Group.
(c) The Executive agrees that he will (i) devote such business
time and attention as are required to perform the functions
assigned to him; (ii) carry out his duties and work with other
employees of the TDL Group and, to the extent necessary,
employees of Wendy's, in a competent and professional manner;
and (iii) generally use his best efforts, skill and ability to
promote the best interests of the TDL Group.
(d) Each July during the Term, the Board of Directors of the
Company shall unilaterally direct the Employee to make himself
available to perform services under this Employment Agreement
for a minimum number of days (not less than 85 days and not
more than 150 days) during the subsequent twelve month period.
Notwithstanding the foregoing, the minimum number of days
shall be set at 85 days for the twelve month period ending
July 1, 1999 and 150 days for the twelve month period ending
July 1, 2000.
(e) The Executive's services shall be performed at the Company's
offices in Calgary, Canada, or such other place as the Company
and Executive shall from time to time agree, subject to
reasonably necessary travel requirements of his position and
duties hereunder.
4. Compensation
------------
As compensation for his services hereunder for the period ending on
June 30, 1999, the Company shall pay the Executive, as soon as
practicable after execution of this Employment Agreement, a lump sum
payment equal to the Canadian dollar equivalent of US$100,000, less
applicable withholding. As compensation for his services hereunder for
the twelve month period ending on June 30, 2000, on July 1, 1999, the
Company shall pay the Executive a lump sum payment equal to the
Canadian dollar equivalent of US$175,000, less applicable withholding.
As compensation for his services hereunder for each twelve month period
ending on June 30 in 2001, 2002 and 2003, assuming that the Company
directs the Executive to make himself available
25
<PAGE> 3
for 150 days for each such period, on July 1 of each such year, or on
the first business day thereafter, the Company shall pay the Executive
a lump sum payment equal to the Canadian dollar equivalent of
US$175,000, less applicable withholding. If the Company directs the
Executive to make himself available for less than 150 days for such
twelve month period, the compensation under this section shall be
prorated (but not below the Canadian dollar equivalent of US$100,000)
without regard to the number of days the Executive actually made
himself available. Notwithstanding the foregoing, the Executive may
elect in writing that the compensation for any twelve month period
shall be paid in U.S. dollars without conversion to the Canadian dollar
equivalent.
5. Termination, Confidentiality and Non-Competition
------------------------------------------------
(a) The Company shall be entitled to terminate the Term and to
discharge the Executive for "Cause" without notice, or any
payment in lieu of notice, and in such event the Executive's
right to receive any unearned, non-vested or non-accrued
compensation hereunder from the Company shall then forthwith
terminate. The term "Cause" shall have the same definition as
that set forth in the employment agreement between the
Executive, The TDL Group Ltd. and Wendy's, dated December 29,
1995; however, all references within such definition to the
duties to the Company shall refer to the Company as defined in
this Employment Agreement.
(b) Executive is and shall continue to be subject to the same
duties of confidentiality, the protection of confidential
information, non-competition, non-solicitation and loyalty to
the Company and Wendy's as those described and set forth in
section 8 of the employment agreement between the Executive,
The TDL Group Ltd. and Wendy's, dated December 29, 1995, as if
the said section 8 had been set forth in its entirety in this
Employment Agreement. All references in the said section 8 to
the duties to the Company shall mean the Company as defined in
this Employment Agreement.
6. Enforceability
--------------
The failure of either party at any time to require performance by the
other party of any provision hereunder shall in no way affect the right
of that party thereafter to enforce the same, nor shall it affect any
other party's right to enforce the same, or to enforce any of the other
provisions in this Employment Agreement; nor shall the waiver by either
party of the breach of any provision hereof be taken or held to be a
waiver of any subsequent breach of such provision or as a waiver of the
provision itself.
7. Assignment
----------
This Employment Agreement is a personal contract and the Executive's
rights and obligations hereunder may not be sold, transferred,
assigned, pledged or hypothecated by the Executive. The rights and
obligations
26
<PAGE> 4
of the Company hereunder shall be binding upon and run in favor of the
Company; provided, however, the Company may not assign its rights and
obligations under this Employment Agreement except in connection with
the sale or transfer of all or substantially all of the Company's
business (whether by way of sale of assets, amalgamation or otherwise).
8. Modification
------------
This Employment Agreement may not be orally cancelled, changed,
modified or amended, and no cancellation, change, modification or
amendment shall be effective or binding, unless in writing and signed
by both parties to this Employment Agreement, and approved in writing
by the Chief Executive Officer of Wendy's.
9. Severability
------------
In the event any provision of this Employment Agreement is found to be
void and unenforceable by a court of competent jurisdiction, the
remaining provisions of this Employment Agreement shall nevertheless be
binding upon the parties with the same effect as though the void or
unenforceable provision had been severed and deleted. The provisions of
sections 5 and 9 shall survive termination of this Employment
Agreement.
10. Notice
------
All notices and other communications hereunder shall be in writing and
shall be deemed given if delivered by hand, sent by facsimile
transmission with confirmation of receipt requested, or sent via a
reputable international courier service with confirmation of receipt
requested, to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice), and shall be
deemed given on the date on which delivered by hand or otherwise on the
date of receipt as confirmed:
If to the Executive:
- --------------------
Ronald V. Joyce
10 Blue Ridge Mountain Estates
Calgary, Alberta, T2M 4N4
Facsimile: (403) 547-5953
If to the Company:
- ------------------
874 Sinclair Road
Oakville, Ontario, L6K 2Y1
27
<PAGE> 5
with a copy to:
---------------
Wendy's International, Inc.
P.O. Box 256
4288 West Dublin Granville Road
Dublin, Ohio 43017 U.S.A.
Attention: Frederick R. Reed
Facsimile: (614) 764-3243
11. Applicable Law
--------------
This Employment Agreement shall be governed by and construed in accordance
with the laws of the Province of Ontario (and the laws of Canada
applicable therein) without regard to their respective conflict of law
rules.
12. No Conflict
-----------
The Executive represents and warrants that he is not subject to any
agreement, instrument, order, judgment or decree of any kind, or any
other restrictive agreement of any character, which would prevent him
from entering into this Employment Agreement or which would be breached
by the Executive upon the performance of his duties pursuant to this
Employment Agreement.
13. Entire Agreement
----------------
This Employment Agreement represents the entire agreement between the
Company and the Executive with respect to the subject matter hereof,
and all prior agreements relating to the employment of the Executive by
the Company, written or oral, are nullified and superseded hereby.
14. Headings
--------
The headings contained in this Employment Agreement are for reference
purposes only, and shall not affect the meaning or interpretation of
this Employment Agreement.
IN WITNESS WHEREOF the parties have executed this Employment Agreement on and as
of the day and year first above written.
THE TDL GROUP CO.
By: /s/ Gordon F. Teter
-------------------------
Gordon F. Teter
Chairman of the Board and
Chief Executive Officer
28
<PAGE> 6
SIGNED, SEALED AND DELIVERED
in the presence of:
/s/ Donald B. Schroeder /s/ Ronald Vaughan Joyce
- ----------------------- ------------------------
Donald B. Schroeder RONALD VAUGHAN JOYCE
ACKNOWLEDGED AND AGREED TO FOR THE
PURPOSES OF SECTION 5.
WENDY'S INTERNATIONAL, INC.
By: /s/ Gordon F. Teter
------------------------
Gordon F. Teter
Chairman of the Board, Chief
Executive Officer and President
29
<PAGE> 1
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
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 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.
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.
30
<PAGE> 2
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.
TRANSACTIONS TO IMPROVE RETURN ON INVESTMENT. The Company owns several notes
receivable issued by franchisees. The Company has entered into an agreement with
a third party lender that permits the lender to contact franchisees, offer to
refinance notes and enter into commitments to refinance such notes on or before
March 31, 1999. The Company expects that a substantial portion of the notes will
be refinanced. However, franchisees could decide to not refinance for various
reasons, including changes in economic, credit market or other conditions, and
the Company cannot require franchisees to refinance. In addition, the timing of
refinancing transactions would be controlled by the lender and franchisees. As a
result, there is no assurance as to when the Company could receive cash proceeds
or realize income from refinancing transactions.
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.
YEAR 2000. The Company anticipates timely completion of its program to address
year 2000 issues. However, if the new information systems are not implemented on
a timely basis, modifications to existing systems cannot be accomplished on a
timely basis, information technology resources do not remain available, or other
unanticipated events occur, there would be adverse financial and operational
effects on the Company. The amount of these effects cannot be ascertained at
this time.
31
<PAGE> 3
Although the Company has not been informed of material year 2000 issues by third
parties with which it has a material relationship or franchisees, there is no
assurance that these entities will be year 2000 compliant on a timely basis.
Unanticipated failures or significant delays in furnishing products or services
by third parties or general public infrastructure service providers, or the
inability of franchisees to perform sales reporting and financial management
functions or to make timely payments to the Company or suppliers, could have a
material adverse effect on results of operations, financial condition and/or
liquidity.
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.
32
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<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> JUL-06-1998
<PERIOD-END> OCT-04-1998
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0
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