<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 3, 1999
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 5, 1999
- -------------------------------- -------------------------------
Common shares, $.10 stated value 119,570,000 shares
Exhibit index on page 17.
1
<PAGE> 2
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
PART I: Financial Information
Item 1. Financial Statements:
Consolidated Condensed Statements of Income for the quarter
and year-to-date periods ended October 3, 1999 and
October 4, 1998 3 - 4
Consolidated Condensed Balance Sheets as of October 3, 1999
and January 3, 1999 5 - 6
Consolidated Condensed Statements of Cash Flows for the
year-to-date periods ended October 3, 1999 and October 4, 1998 7
Notes to the Consolidated Condensed Financial Statements 8 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 14
PART II: Other Information
Item 6. Exhibits and reports on Form 8-K 15
Signature 16
Index to Exhibits 17
Exhibit 99 18 - 19
</TABLE>
2
<PAGE> 3
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share data)
QUARTER ENDED QUARTER ENDED
OCTOBER 3, 1999 OCTOBER 4, 1998
--------------- ---------------
<S> <C> <C>
REVENUES
Retail sales..................................... $438,868 $388,881
Franchise revenues............................... 101,841 96,294
-------- -------
540,709 485,175
-------- --------
COSTS AND EXPENSES
Cost of sales.................................... 276,082 241,756
Company restaurant operating
costs.......................................... 96,061 88,319
Operating costs.................................. 19,857 14,516
General and administrative
expenses....................................... 48,369 46,578
Depreciation and amortization
of property and equipment...................... 24,796 23,267
Other expense.................................... 1,585 19
Interest, net................................... 2,249 908
-------- --------
468,999 415,363
-------- --------
INCOME BEFORE INCOME TAXES........................... 71,710 69,812
INCOME TAXES......................................... 27,250 26,877
-------- --------
NET INCOME........................................... $ 44,460 $ 42,935
======== ========
BASIC EARNINGS PER COMMON SHARE...................... $.37 $.34
==== ====
DILUTED EARNINGS PER COMMON SHARE.................... $.35 $.33
==== ====
DIVIDENDS PER COMMON SHARE........................... $.06 $.06
==== ====
BASIC SHARES......................................... 121,482 126,567
======= =======
DILUTED SHARES....................................... 130,739 135,182
======= =======
</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 STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share data)
39 WEEKS ENDED 40 WEEKS ENDED
OCTOBER 3, 1999 OCTOBER 4, 1998
--------------- ---------------
<S> <C> <C>
REVENUES
Retail sales..................................... $1,251,026 $1,205,942
Franchise revenues............................... 294,776 264,770
--------- ---------
1,545,802 1,470,712
--------- ---------
COSTS AND EXPENSES
Cost of sales.................................... 784,528 755,862
Company restaurant operating
costs.......................................... 273,476 275,262
Operating costs.................................. 57,386 47,028
General and administrative
expenses....................................... 144,169 136,432
Depreciation and amortization
of property and equipment...................... 72,439 72,347
Other expense (income)........................... 3,639 (399)
Interest, net.................................... 6,948 1,461
--------- ---------
1,342,585 1,287,993
--------- ---------
INCOME BEFORE INCOME TAXES........................... 203,217 182,719
INCOME TAXES......................................... 77,222 70,347
--------- ---------
NET INCOME........................................... $ 125,995 $ 112,372
========= =========
BASIC EARNINGS PER COMMON SHARE...................... $1.03 $.87
===== ====
DILUTED EARNINGS PER COMMON SHARE.................... $.99 $.85
==== ====
DIVIDENDS PER COMMON SHARE........................... $.18 $.18
==== ====
BASIC SHARES......................................... 122,887 129,673
======= =======
DILUTED SHARES....................................... 132,080 138,471
======= =======
</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 SHEETS
<TABLE>
<CAPTION>
(In thousands)
OCTOBER 3, 1999 JANUARY 3, 1999
--------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............. $ 238,599 $ 160,743
Accounts receivable, net.............. 65,988 74,737
Notes receivable, net................. 7,591 19,952
Deferred income taxes................. 17,390 23,177
Inventories and other................. 28,944 35,085
--------- ---------
358,512 313,694
--------- ---------
PROPERTY AND EQUIPMENT.................... 1,859,916 1,783,212
Accumulated depreciation and
amortization........................ (537,599) (502,418)
--------- ---------
1,322,317 1,280,794
--------- ---------
NOTES RECEIVABLE, NET..................... 38,766 126,366
GOODWILL, NET............................. 49,062 50,723
DEFERRED INCOME TAXES..................... 13,765 15,090
OTHER ASSETS.............................. 40,668 51,280
--------- ---------
$1,823,090 $1,837,947
========= =========
</TABLE>
The accompanying Notes are an integral part of the Consolidated
Condensed Financial Statements.
5
<PAGE> 6
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands)
OCTOBER 3, 1999 JANUARY 3, 1999
--------------- ---------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................. $ 72,481 $ 101,100
Accrued expenses:
Salaries and wages............................ 25,543 27,228
Taxes......................................... 39,561 31,105
Insurance..................................... 35,507 34,944
Other......................................... 39,643 49,636
Current portion of long-term
obligations................................... 5,048 5,399
--------- ---------
217,783 249,412
--------- ---------
LONG-TERM OBLIGATIONS
Term debt........................................ 204,927 205,371
Capital leases................................... 42,286 40,676
--------- ---------
247,213 246,047
--------- ---------
DEFERRED INCOME TAXES................................ 58,077 60,707
OTHER LONG-TERM LIABILITIES.......................... 15,318 13,714
COMMITMENTS AND CONTINGENCIES
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF WENDY'S
FINANCING I, HOLDING SOLELY WENDY'S
CONVERTIBLE DEBENTURES............................ 200,000 200,000
SHAREHOLDERS' EQUITY
Preferred stock, authorized: 250,000 shares
Common stock, $.10 stated value per share
Authorized: 200,000,000 shares
Issued and Exchangeable:
134,774,000 and 133,415,000 shares,
respectively................................. 11,933 11,796
Capital in excess of stated value................ 397,142 370,288
Retained earnings................................ 1,035,465 931,603
Accumulated other comprehensive expense.......... (20,895) (33,355)
--------- ---------
1,423,645 1,280,332
Treasury stock at cost: 14,001,000 and 9,410,000
shares, respectively........................... (338,946) (212,265)
--------- ---------
1,084,699 1,068,067
--------- ---------
$1,823,090 $1,837,947
========= =========
</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 STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
39 WEEKS ENDED 40 WEEKS ENDED
OCTOBER 3, 1999 OCTOBER 4, 1998
--------------- ---------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING
ACTIVITIES....................................... $ 208,818 $ 156,396
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from asset dispositions................. 84,231 76,715
Capital expenditures............................. (185,020) (161,465)
Acquisition of franchises........................ (1,355) (4,827)
Payments on notes receivable..................... 100,468 21,520
Other investing activities....................... 1,530 (6,246)
-------- --------
Net cash used in investing activities.......... (146) (74,303)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock........... 21,588 11,766
Repurchase of common and exchangeable
shares (126,681) (197,800)
Principal payments on long-term
obligations.................................... (3,590) (4,384)
Dividends paid on common and
exchangeable shares............................ (22,133) (23,445)
-------- --------
Net cash used in financing activities.......... (130,816) (213,863)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 77,856 (131,770)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD.......................................... 160,743 234,262
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........... $ 238,599 $ 102,492
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid.................................... $18,547 $18,684
Capitalized lease obligations incurred........... 3,786 3,418
Notes receivable from restaurant dispositions.... -- 9,813
Acquisition of franchises:
Fair value of assets acquired, net............. 1,355 4,907
Cash paid...................................... 1,355 4,827
Liabilities assumed............................ -- 80
</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) at October 3,
1999 and January 3, 1999 and the condensed results of operations and
comprehensive income (see Note 3) for the quarter and 39 weeks ended
October 3, 1999 and quarter and 40 weeks ended October 4, 1998, and cash
flows for the 39 weeks ended October 3, 1999 and 40 weeks ended October 4,
1998. The Notes to the audited Consolidated Financial Statements which are
contained in the Appendix to the Company's 1999 Proxy Statement should be
read in conjunction with these Consolidated Condensed Financial Statements.
NOTE 2. 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>
QUARTER QUARTER 39 WEEKS 40 WEEKS
ENDED ENDED ENDED ENDED
OCT. 3, 1999 OCT. 4, 1998 OCT. 3, 1999 OCT. 4, 1998
------------ ------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Income for computation of basic earnings
per share................................... $44,460 $42,935 $125,995 $112,372
Interest savings (net of taxes) on assumed
conversions................................. 1,572 1,612 4,717 4,799
------- ------- -------- --------
Income for computation of diluted
earnings per common share................... $46,032 $44,547 $130,712 $117,171
======= ======= ======== ========
Weighted average shares for computation
of basic earnings per common share.......... 121,482 126,567 122,887 129,673
Incremental shares on assumed exercise
of stock options............................ 1,684 1,042 1,620 1,225
Assumed conversions........................... 7,573 7,573 7,573 7,573
------- ------- ------- -------
Weighted average shares for computation
of diluted earnings per common share........ 130,739 135,182 132,080 138,471
======= ======= ======= =======
Basic earnings per common share............... $.37 $.34 $1.03 $.87
==== ==== ===== ====
Diluted earnings per common share............. $.35 $.33 $.99 $.85
==== ==== ==== ====
</TABLE>
8
<PAGE> 9
NOTE 3. CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
The components of other comprehensive income (expense) and total comprehensive
income (expense) are shown below:
<TABLE>
<CAPTION>
QUARTER QUARTER 39 WEEKS 40 WEEKS
ENDED ENDED ENDED ENDED
OCT. 3, 1999 OCT. 4, 1998 OCT. 3, 1999 OCT. 4, 1998
------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Net income............................................ $44,460 $42,935 $125,995 $112,372
Other comprehensive income (expense):
Translation adjustments............................... 2,272 (7,946) 12,947 (13,764)
Other (net of taxes of $68, $528, $388 and
$323, respectively)................................. (85) (662) (487) (405)
------- ------- -------- -------
Total other comprehensive income (expense)............ 2,187 (8,608) 12,460 (14,169)
------- ------- -------- -------
Comprehensive income.................................. $46,647 $34,327 $138,455 $98,203
======= ======= ======== =======
</TABLE>
NOTE 4. SEGMENT REPORTING
The Company operates exclusively in the food-service industry and has determined
that its reportable segments are those that are based on the Company's methods
of internal reporting and management structure. The Company's reportable
segments are: Domestic Wendy's, Tim Hortons and International Wendy's.
International Wendy's is comprised of Wendy's of Canada and other Wendy's
operations outside the United States. There were no material amounts of revenues
or transfers among reportable segments.
The table below presents information about reportable segments:
<TABLE>
<CAPTION>
DOMESTIC WENDY'S TIM HORTONS INTERNATIONAL WENDY'S TOTAL
---------------- ----------- --------------------- -----
(In thousands)
<S> <C> <C> <C> <C>
QUARTER ENDED OCTOBER 3, 1999
Revenues $379,128 $123,411 $38,170 $540,709
Income before income taxes 72,554 23,573 229 96,356
Capital expenditures 49,455 17,264 4,251 70,970
QUARTER ENDED OCTOBER 4, 1998
Revenues $359,917 $94,940 $30,318 $485,175
Income before income taxes 74,060 15,922 1,512 91,494
Capital expenditures 33,512 16,351 5,451 55,314
39 WEEKS ENDED OCTOBER 3, 1999
Revenues $1,101,132 $345,529 $99,141 $1,545,802
Income before income taxes 209,763 63,473 955 274,191
Capital expenditures 121,940 51,719 11,361 185,020
40 WEEKS ENDED OCTOBER 4, 1998
Revenues $1,079,836 $291,742 $99,134 $1,470,712
Income before income taxes 193,381 47,395 3,508 244,284
Capital expenditures 100,628 49,321 11,516 161,465
</TABLE>
9
<PAGE> 10
A reconciliation of reportable segment income before income taxes to
consolidated income before income taxes follows:
<TABLE>
<CAPTION>
QUARTER QUARTER 39 WEEKS 40 WEEKS
ENDED ENDED ENDED ENDED
OCT. 3, 1999 OCT. 4, 1998 OCT. 3, 1999 OCT. 4, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income before income taxes $96,356 $91,494 $274,191 $244,284
Corporate charges (24,646) (21,682) (70,974) (61,565)
------- ------- ------- -------
Consolidated income before income taxes $71,710 $69,812 $203,217 $182,719
======= ======= ======== ========
</TABLE>
Corporate charges include certain overhead costs and net interest expense.
NOTE 5. SUBSEQUENT EVENT
In October, 1999, the Company closed seven company operated restaurants in the
United Kingdom due to high real estate and operating costs. The Company does not
expect a significant impact on fourth quarter 1999 earnings.
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 1999, the Company's net income increased 3.6% to $44.5
million from $42.9 million in 1998, and diluted earnings per common share (EPS)
increased 6% to $.35. In the third quarter 1999, pretax asset gains were $2.4
million ($.01 per share) versus $11.3 million ($.05 per share) in the third
quarter 1998.
Year-to-date 1999 net income was $126.0 million versus $112.4 million in 1998, a
12.1% increase. EPS was $.99 in 1999, a 16% increase over $.85 for 1998. The
year-to-date results include 39 weeks of operations in 1999 versus 40 weeks in
1998. In both periods, average restaurant sales increased significantly in 1999
for Wendy's and Tim Hortons (Hortons) restaurants, and, in both periods, the
domestic Wendy's operating margin improved.
RETAIL SALES
Retail sales for the third quarter 1999 increased $50.0 million, or 12.9%, to
$438.9 million and increased $45.1 million to $1.3 billion for year-to-date
1999. Average restaurant sales increased 7.3% for the third quarter 1999 and
10.5% year-to-date in Wendy's domestic company restaurants. Average same-store
sales in Wendy's domestic company restaurants increased approximately 7.1% in
the third quarter and 8.4% year-to-date. Average domestic Wendy's transaction
counts were up 4.1% and 6.6% for the third quarter and year-to-date 1999,
respectively. Domestic selling price increased .5% in the third quarter and .4%
year-to-date 1999. Hortons warehouse sales for the third quarter 1999 increased
21.3%, or $10.1 million, to $57.7 million and 17.8%, or $25.4 million,
year-to-date to $168.3 million. This increase was primarily the result of the
development of new stores by Hortons and Hortons Canada average same-store sales
increases of 12.5% and 11.9% for the third quarter and year-to-date,
respectively.
Average sales per domestic Wendy's restaurant, adjusted to eliminate the impact
of the extra week in second quarter 1998, for the quarters and year-to-date
periods ended October 3, 1999 and October 4, 1998 were as follows:
<TABLE>
<CAPTION>
Third Quarter Year-to-Date
------------- ------------
% %
1999 1998 Increase 1999 1998 Increase
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Company........................ $333,400 $310,550 7.3 $967,450 $875,650 10.5
Franchise........................ 287,200 270,350 6.2 829,400 770,800 7.6
Total Domestic.................. 296,300 278,450 6.4 856,750 793,550 8.0
</TABLE>
The number of systemwide restaurants open as of October 3, 1999 and October 4,
1998 was as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Company............................... 1,080 1,021
Franchise............................. 4,351 4,245
----- -----
Total Wendy's......................... 5,431 5,266
===== =====
Total Hortons......................... 1,751 1,598
===== =====
Total System 7,182 6,864
===== =====
</TABLE>
COST OF SALES AND RESTAURANT OPERATING COSTS
The domestic Wendy's company operating margin increased in the third quarter
1999 to 16.8% versus 16.4% for 1998 and was 16.8% in 1999 versus 15.5% for the
year-to-date comparison. This was primarily due to strong sales growth at
company stores and store-level productivity initiatives. Wendy's domestic
restaurant operating costs, as a percent of retail sales, decreased over 1998
for both the quarter and year-to-date periods, primarily reflecting the leverage
benefit of higher average sales. In addition, the quarter reflected lower
utility, salaries and benefits, rent and insurance costs. The year-to-date
reflected lower utility, insurance and advertising costs.
11
<PAGE> 12
Domestic Wendy's cost of sales, as a percent of sales, increased .1% in the
third quarter 1999 versus 1998, reflecting higher food costs. For the year,
domestic Wendy's cost of sales decreased .3% over 1998. This reflected lower
overall store labor costs, as a percent of sales, even with an increase of more
than 5.5% in the hourly store crew wage rate, lower paper costs and the
leveraging benefit of higher average sales. However, food costs were higher with
increased beef costs, particularly in the third quarter, and increased chicken
costs. Hortons warehouse cost of sales remained relatively constant as a percent
of warehouse sales and total cost of sales increased in line with retail sales.
FRANCHISE REVENUES
Domestic Wendy's royalties, before reserve provisions, increased $4.1 million in
the third quarter 1999 to $43.7 million. An average of 143 more Wendy's domestic
franchise restaurants were open in 1999 and average sales of Wendy's domestic
franchise restaurants increased 6.2% in the third quarter 1999 over 1998. For
the year-to-date comparison, domestic royalties before reserves increased $12.2
million to $125.1 million in 1999. This reflected an average of 202 more
franchise restaurants and average sales increases of 7.6%, offset by one less
week of operations in 1999. Average same-store sales at Hortons Canadian
restaurants increased 12.5% for the third quarter 1999 and 11.9% year-to-date
1999 resulting in increased royalty income partly offset by one less week of
operations. Hortons opened 31 franchise stores in the third quarter and 83
franchise stores year-to-date 1999, respectively. Franchise reserves of $1.1
million and $758,000 were provided year-to-date 1999 and 1998, respectively.
Asset gains decreased $8.9 million in the third quarter 1999. This was primarily
the result of a $9.2 million decrease in gains realized from the sale of rental
properties. Asset gains decreased $3.3 million year-to-date 1999. This was the
result of a $9.9 million decrease in gains from the sale of rental properties,
offset by a $5.0 million increase in pretax gains from franchising Wendy's
restaurants and $1.7 million in fees earned by the Company related to
refinancing notes receivable.
Rental income for the quarter increased $3.7 million to $33.5 million in 1999
and increased $11.7 million year-to-date 1999 to $96.7 million. This was
primarily a result of more Hortons franchise leased properties and the increased
average sales at Hortons resulting in $3.6 million increased rental income in
the third quarter and $8.7 million year-to-date 1999. This also reflects one
less week of operations in 1999. Franchise fees increased $5.7 million
year-to-date 1999 to $24.9 million. This primarily represented increased Hortons
franchise fees of $6.1 million as a result of more store openings.
OPERATING COSTS
Operating costs for the third quarter increased $5.3 million to $19.9 million in
1999 and increased $10.4 million to $57.4 million for year-to-date 1999. The
increase over 1998 reflects the growth in the number of properties being leased
and then subleased to franchisees by Hortons, and in the quarter, increased
equipment costs for Hortons reflecting more stores franchised.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the third quarter of 1999 were $48.4
million versus $46.6 million in 1998, or 8.9% and 9.6% of total revenues,
respectively. This decrease is primarily a result of an 11.4% increase in
revenues over 1998 and effective cost controls. Year-to-date 1999, general and
administrative costs were $144.2 million and 9.3% of total revenues compared
with $136.4 million and 9.3% of total revenues in 1998. The total dollar
increase in 1999 also reflects more performance-based bonus expense, due to
strong sales, and increases in professional services for information technology
initiatives.
INTEREST, NET
Net interest increased $1.3 million to $2.2 million in the third quarter 1999
and increased $5.5 million to $6.9 million in the year-to-date comparison. This
primarily reflects a decrease in interest income as there were significantly
lower levels of notes receivable outstanding.
OTHER COMPREHENSIVE INCOME
Other comprehensive income increased primarily due to favorable movement in the
Canadian exchange rate since year-end 1998 (See Note 3).
12
<PAGE> 13
FINANCIAL CONDITION
The Company's financial condition continues to be very strong at the end of the
third quarter of 1999. The long-term debt to equity and debt to total
capitalization ratios were 23% and 19%, respectively, at October 3, 1999. The
Company has initiated a program to maximize return on assets over the long term
by redeploying assets to opportunities that have higher potential returns. The
Company closed or franchised underperforming restaurants during 1998. A total of
72 rental properties have been sold in 1999. A total of $143 million in notes
receivable has been refinanced in 1998 and 1999. The Company plans on continuing
the strategy of improving return on assets. Capital generated from asset
reductions is expected to be used for such programs as share repurchase, new
restaurant development and potential acquisitions. During the quarter, cash of
$58.8 million was used to repurchase 2.1 million common shares. A total of $337
million in cash has been used to purchase 13.9 million shares since the
repurchase program was announced in February 1998. Capital expenditures amounted
to $185 million for 1999 compared with $161 million for 1998.
OUTLOOK
The Company continues to employ its operating strategies as outlined in the
Appendix to the Company's 1999 Proxy Statement. 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 discounts and promotions in domestic and international
markets and higher domestic labor rates. These conditions may continue.
Emphasis continues to be on solid restaurant operations, store-level
productivity initiatives, 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 up to 520 new Wendy's and Hortons
restaurants could be opened systemwide (both company and franchise) during
1999, subject to the continued ability of the Company and its franchisees to
complete permitting and to overcome other regulatory requirements for the
completion of stores in process, and to obtain financing for new restaurant
development. Year-to-date 1999, there were 280 new restaurants opened. Cash
flow from operations, cash and investments on hand 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 existing revolving credit
agreements, potential bank borrowings or the issuance of securities.
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 expected to be substantially year 2000 compliant. This system is
expected to be substantially implemented during 1999. The Company has also
implemented a plan to remediate existing store management systems. This plan is
expected to be completed 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. Substantially
all mainframe systems modified have been tested and put into production.
Substantially all testing and implementation of other high priority information
systems has been completed. The Company is currently addressing potential year
2000 issues on lower priority systems and expects that these systems will be
year 2000 compliant by the end of 1999.
The modifications to existing software are expected to cost approximately $4.2
million, of which $2.4 million has been expensed through 1998 and $1.4 million
has been expensed year-to-date in 1999. The remainder will be expensed in fourth
quarter 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.
13
<PAGE> 14
The Company has initiated communications with various third parties with which
it has significant relationships to determine their readiness with respect to
the year 2000 issue. These third parties include food and paper suppliers,
restaurant equipment suppliers, banks and other entities. Based on responses
received from substantially all of these third parties, it appears that year
2000 issues are being addressed. Although the Company has not been informed of
material year 2000 issues by third parties with which it has material
relationships/or franchisees, there is no assurance that these entities will be
year 2000 compliant on a timely basis. The Company is continuing to evaluate
risks and remedial actions with respect to third parties as year 2000-related
information changes. 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.
The Company has also been communicating with and providing information to its
franchisees regarding the potential business risks associated with the year 2000
issue. Among other things, these communications encourage franchisees to address
year 2000 issues and provide information that could be useful in assessing
potential year 2000 issues. The Company intends to continue responding to
questions and requests for information from franchisees with respect to such
issues.
Despite the Company's extensive efforts to assess potential year 2000 issues,
the installation of a new enterprise-wide information system, remediation of
other systems, and testing program, unanticipated problems during the early
months of 2000 are possible. These problems, which the Company believes are
unlikely, could (depending on their scope and magnitude) have a material
adverse effect on results of operations, financial condition and/or liquidity.
The Company is continuing to develop contingency plans for its high priority
systems and expects those plans to be completed by the end of 1999.
RECENTLY ISSUED ACCOUNTING STANDARDS
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, 2000. 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. Currently this statement would not impact the Company's financial
statements.
SAFE HARBOR STATEMENT
Certain information contained in this Form 10-Q, particularly information
regarding future economic performance and finances, plans and objectives of
management, is forward looking. In some cases, information regarding certain
important factors that could cause actual results to differ materially from any
such forward-looking statement appears together with such statement. In
addition, the following factors, in addition to other possible factors not
listed, could affect the Company's actual results and cause such results to
differ materially from those expressed in forward-looking statements. These
factors include: competition within the quick-service restaurant industry, which
remains extremely intense, both domestically and internationally, with many
competitors pursuing heavy price discounting; changes in economic conditions;
changes in consumer perceptions of food safety; harsh weather, particularly in
the first and fourth quarters; changes in consumer tastes; labor and benefit
costs; legal claims; risks inherent to international development (including
currency fluctuations); the continued ability of the Company and its franchisees
to obtain suitable locations and financing for new restaurant development;
governmental initiatives such as minimum wage rates, taxes and possible
franchise legislation; the ability of the Company to successfully complete
transactions designed to improve its return on investment; 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.
14
<PAGE> 15
PART II: OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K.
(a) Index to Exhibits on Page 17.
(b) The Company filed two Reports on Form 8-K during the third quarter 1999.
The Form 8-K filed July 7, 1999 announced sales and preliminary expected
diluted earnings per share for the second quarter 1999, and a revised range
of projected earnings per share for full year 1999. A copy of the press
release issued July 6, 1999 was attached.
The Form 8-K filed September 21, 1999 announced the approval of a $250
million increase in the Company's share repurchase program and also
discussed third quarter-to-date sales for company-operated domestic Wendy's
restaurants and systemwide Canadian Tim Hortons restaurants. A copy of the
press release issued September 20, 1999 was attached.
15
<PAGE> 16
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: 11/17/99 /s/ Frederick R. Reed
---------- -----------------------------
Frederick R. Reed
Chief Financial Officer
and Secretary
16
<PAGE> 17
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
27 Financial Data Schedule
99 Safe Harbor Under
the Private Securities
Litigation Reform Act of 1995
</TABLE>
17
<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-02-2000
<PERIOD-START> JUL-05-1999
<PERIOD-END> OCT-03-1999
<CASH> 238,599
<SECURITIES> 0
<RECEIVABLES> 73,579
<ALLOWANCES> 0
<INVENTORY> 28,944
<CURRENT-ASSETS> 358,512
<PP&E> 1,859,916
<DEPRECIATION> 537,599
<TOTAL-ASSETS> 1,823,090
<CURRENT-LIABILITIES> 217,783
<BONDS> 404,927
0
0
<COMMON> 11,933
<OTHER-SE> 1,072,766
<TOTAL-LIABILITY-AND-EQUITY> 1,823,090
<SALES> 438,868
<TOTAL-REVENUES> 540,709
<CGS> 276,082
<TOTAL-COSTS> 392,000
<OTHER-EXPENSES> 74,750
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,249
<INCOME-PRETAX> 71,710
<INCOME-TAX> 27,250
<INCOME-CONTINUING> 44,460
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,460
<EPS-BASIC> .37
<EPS-DILUTED> .35
</TABLE>
<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.
Growth Plans. The Company plans to 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.
<PAGE> 2
The opening and success of restaurants depends on various factors, including the
identification and availability of suitable and economically viable locations,
sales levels at existing restaurants, the negotiation of acceptable lease or
purchase terms for new locations, permitting and regulatory compliance, the
ability to meet construction schedules, the financial and other development
capabilities of franchisees, the ability of the Company to hire and train
qualified management personnel, and general economic and business conditions.
International Operations. The Company's business outside of the United States is
subject to a number of additional factors, including international economic and
political conditions, differing cultures and consumer preferences, currency
regulations and fluctuations, diverse government regulations and tax systems,
uncertain or differing interpretations of rights and obligations in connection
with international franchise agreements and the collection of royalties from
international franchisees, the availability and cost of land and construction
costs and the availability of experienced management, appropriate franchisees,
and joint venture partners. Although the Company believes it has developed the
support structure required for international growth, there is no assurance that
such growth will occur or that international operations will be profitable.
Disposition of Restaurants. The disposition of company-operated restaurants to
new or existing franchisees is part of the Company's strategy to develop the
overall health of the system by acquiring restaurants from, and disposing of
restaurants to, franchisees where prudent. The expectation of gains from future
dispositions of restaurants depends in part on the ability of the Company to
complete disposition transactions on acceptable terms.
Transactions to Improve Return on Investment. The sale of real estate previously
leased to franchisees is generally part of the program to improve the Company's
return on invested capital. There are various reasons why the program might be
unsuccessful, including changes in economic, credit market, real estate market
or other conditions, and the ability of the Company to complete sale
transactions on acceptable terms and at or near the prices estimated as
attainable by the Company.
Year 2000. Despite the Company's extensive efforts to assess potential year 2000
issues, the installation of a new enterprise-wide information system,
remediation of other systems, and testing program, unanticipated problems during
the early months of 2000 are possible. These problems, which the Company
believes are unlikely, could (depending on their scope and magnitude) have a
material adverse effect on results of operations, financial condition and/or
liquidity.
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.
