<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 April 4, 1999
-------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-8116
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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 May 7, 1999
- -------------------------------- --------------------------------
Common shares, $.10 stated value 123,401,000 shares
Exhibit index on page 15.
1 of 18
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<TABLE>
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
<CAPTION>
Pages
-----
<S> <C> <C>
PART I: Financial Information
Item 1. Financial Statements:
Consolidated Condensed Statements of Income for
the quarters ended April 4, 1999 and March 29, 1998. 3
Consolidated Condensed Balance Sheets as of April 4,
1999 and January 3, 1999. 4 - 5
Consolidated Condensed Statements of Cash Flows
for the quarters ended April 4, 1999 and March 29,
1998. 6
Notes to the Consolidated Condensed Financial
Statements 7 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 12
PART II: Other Information
Item 6 13
Signature 14
Index to Exhibits 15
Exhibit 27 16
Exhibit 99 17 - 18
</TABLE>
2
<PAGE> 3
<TABLE>
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
(In thousands, except per share data)
QUARTER ENDED QUARTER ENDED
APRIL 4, 1999 MARCH 29, 1998
------------- --------------
<S> <C> <C>
REVENUES
Retail sales ............................... $389,320 $381,588
Franchise revenues ......................... 87,223 73,985
-------- --------
476,543 455,573
-------- --------
COSTS AND EXPENSES
Cost of sales .............................. 246,439 242,691
Company restaurant operating
costs .................................... 86,742 91,206
Operating costs ............................ 18,202 14,551
General and administrative
expenses ................................. 47,048 43,168
Depreciation and amortization
of property and equipment ................ 23,523 24,754
Other expense (income) ..................... 1,224 (9)
Interest, net .............................. 1,747 (182)
-------- --------
424,925 416,179
-------- --------
INCOME BEFORE INCOME TAXES ..................... 51,618 39,394
INCOME TAXES ................................... 19,615 15,560
-------- --------
NET INCOME ..................................... $ 32,003 $ 23,834
======== ========
BASIC EARNINGS PER COMMON SHARE ................ $ .26 $ .18
======== ========
DILUTED EARNINGS PER COMMON SHARE .............. $ .25 $ .18
======== ========
DIVIDENDS PER COMMON SHARE ..................... $ .06 $ .06
======== ========
BASIC SHARES ................................... 124,061 132,198
======== ========
DILUTED SHARES ................................. 133,053 141,023
======== ========
</TABLE>
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
3
<PAGE> 4
<TABLE>
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<CAPTION>
(In thousands)
APRIL 4, 1999 JANUARY 3, 1999
------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............. $ 184,899 $ 160,743
Accounts receivable, net .............. 72,335 74,737
Notes receivable, net ................. 17,197 19,952
Deferred income taxes ................. 21,874 23,177
Inventories and other ................. 38,623 35,085
---------- ----------
334,928 313,694
---------- ----------
PROPERTY AND EQUIPMENT .................... 1,814,368 1,783,212
Accumulated depreciation and
amortization ........................ (520,210) (502,418)
---------- ----------
1,294,158 1,280,794
---------- ----------
NOTES RECEIVABLE, NET ..................... 86,216 126,366
GOODWILL, NET ............................. 49,997 50,723
DEFERRED INCOME TAXES ..................... 14,753 15,090
OTHER ASSETS .............................. 42,123 51,280
---------- ----------
$1,822,175 $1,837,947
========== ==========
</TABLE>
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
4
<PAGE> 5
<TABLE>
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<CAPTION>
(In thousands)
APRIL 4, 1999 JANUARY 3, 1999
------------- ---------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ............................... $ 69,840 $ 101,100
Accrued expenses:
Salaries and wages .......................... 16,283 30,432
Taxes ....................................... 35,940 31,105
Insurance ................................... 33,957 34,944
Other ....................................... 42,833 46,432
Current portion of long-term
obligations ................................. 5,756 5,399
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204,609 249,412
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LONG-TERM OBLIGATIONS
Term debt ...................................... 205,130 205,371
Capital leases ................................. 41,092 40,676
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246,222 246,047
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DEFERRED INCOME TAXES .............................. 62,244 60,707
OTHER LONG-TERM LIABILITIES ........................ 13,771 13,714
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF WENDY'S
FINANCING I, HOLDING SOLELY WENDY'S
CONVERTIBLE DEBENTURES .......................... 200,000 200,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock Authorized: 250,000 shares
Common stock, $.10 stated value per share
Authorized: 200,000,000 shares
Issued and Exchangeable:
133,925,000 and 133,415,000 shares,
respectively ............................... 11,964 11,796
Capital in excess of stated value .............. 379,649 370,288
Retained earnings .............................. 956,160 931,603
Accumulated other comprehensive expense ........ (27,992) (33,355)
---------- ----------
1,319,781 1,280,332
Treasury stock at cost: 9,897,000 and
9,410,000 shares, respectively ............... (224,452) (212,265)
---------- ----------
1,095,329 1,068,067
---------- ----------
$1,822,175 $1,837,947
========== ==========
</TABLE>
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
5
<PAGE> 6
<TABLE>
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
(In thousands)
QUARTER ENDED QUARTER ENDED
APRIL 4, 1999 MARCH 29, 1998
------------- --------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES ............ $ 39,063 $ 30,840
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from asset dispositions ................. 12,805 16,609
Capital expenditures ............................. (54,850) (56,600)
Acquisition of franchises ........................ (480) (1,537)
Payments on notes receivable ..................... 41,147 4,097
Other investing activities ....................... (102) (2,251)
-------- --------
Net cash used in investing activities .......... (1,480) (39,682)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock ........... 7,560 2,517
Repurchase of common shares ...................... (12,187) (15,449)
Principal payments on long-term obligations ...... (1,354) (1,727)
Dividends paid on common and
exchangeable shares ............................ (7,446) (7,934)
-------- --------
Net cash used in financing activities .......... (13,427) (22,593)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..... 24,156 (31,435)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..... 160,743 234,262
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........... $184,899 $202,827
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid .................................... $ 3,536 $ 4,010
Capitalized lease obligations incurred ........... 574 1,169
Notes receivable from restaurant dispositions .... 205 --
Income taxes paid ................................ 11,766 14,478
Acquisition of franchises:
Fair value of assets acquired, net ............. 480 1,612
Cash paid ...................................... 480 1,537
Liabilities assumed ............................ -- 75
</TABLE>
The accompanying Notes are an integral part of the Consolidated Condensed
Financial Statements.
6
<PAGE> 7
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 April 4,
1999 and January 3, 1999 and the condensed results of operations, cash
flows and comprehensive income (see Note 3) for the quarters ended April 4,
1999 and March 29, 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 ENDED QUARTER ENDED
APRIL 4, 1999 MARCH 29,1998
------------- -------------
(In thousands, except per share data)
<S> <C> <C>
Income for computation of basic earnings
per share ................................... $ 32,003 $ 23,834
Interest savings (net of taxes) on assumed
conversions ................................. 1,572 1,534
-------- --------
Income for computation of diluted
earnings per share .......................... $ 33,575 $ 25,368
======== ========
Weighted average shares for computation
of basic earnings per share ................. 124,061 132,198
Incremental shares on assumed exercise
of stock options ............................ 1,419 1,252
Assumed conversions ........................... 7,573 7,573
-------- --------
Weighted average shares for computation
of diluted earnings per share ............... 133,053 141,023
======== ========
Basic earnings per share ...................... $ .26 $ .18
======== ========
Diluted earnings per share .................... $ .25 $ .18
======== ========
</TABLE>
7
<PAGE> 8
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 ENDED QUARTER ENDED
APRIL 4, 1999 MARCH 29, 1998
------------- --------------
(In thousands)
<S> <C> <C>
Net income ............................................ $32,003 $23,834
Other comprehensive income:
Translation adjustments ............................... 5,926 3,752
Other (net of taxes of $448 and $55, respectively) .... (563) 69
------- -------
Total other comprehensive income .................... 5,363 3,821
------- -------
Comprehensive income .................................. $37,366 $27,655
======= =======
</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 for the quarters
ended April 4, 1999 and March 29, 1998, respectively:
<TABLE>
<CAPTION>
DOMESTIC INTERNATIONAL
WENDY'S TIM HORTONS WENDY'S TOTAL
------- ----------- ------- -----
(In thousands)
<S> <C> <C> <C> <C>
1999
- ----
Revenues $342,872 $106,154 $27,517 $476,543
Income (loss) before income taxes 55,436 17,432 (182) 72,686
Capital expenditures 31,480 19,542 3,828 54,850
1998
- ----
Revenues $334,788 $ 89,481 $31,304 $455,573
Income (loss) before income taxes 43,894 13,800 (762) 56,932
Capital expenditures 36,462 15,658 4,480 56,600
</TABLE>
A reconciliation of reportable segment income before income taxes to
consolidated income before income taxes follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Income before income taxes $ 72,686 $ 56,932
Corporate charges (21,068) (17,538)
-------- --------
Consolidated income before income taxes $ 51,618 $ 39,394
======== ========
</TABLE>
Corporate charges include all overhead costs and net interest expense.
8
<PAGE> 9
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 first quarter of 1999, the Company's net income increased 34% to $32.0
million, and diluted earnings per common share (EPS) increased 39% to $.25. The
Company recorded net income of $23.8 million and diluted EPS of $.18 in the
first quarter 1998. In the first quarter 1999, pretax asset gains (including fee
income of $1.2 million as a result of franchisees refinancing notes receivable
owned by the Company) were $1.8 million versus $82,000 in the first quarter
1998. Average restaurant sales increased significantly in 1999 for both Wendy's
and Tim Hortons (Hortons) restaurants, and the domestic Wendy's operating margin
improved from 13.4% to 15.8%.
RETAIL SALES
- ------------
Average restaurant sales increased 13.3% for the first quarter 1999 in Wendy's
domestic company restaurants. Average same-store sales in Wendy's domestic
company restaurants increased approximately 9.9% in the first quarter. Average
domestic Wendy's transaction counts were up 8.5% and domestic selling prices
increased .4% in the first quarter 1999. Sales from the Hortons warehouse
increased 18.8% in the first quarter as the Hortons' system continues to develop
new stores combined with an average same-store sales increase of 10.1% for the
first quarter.
Average sales per domestic Wendy's restaurant for the quarters ended April 4,
1999 and March 29, 1998 were as follows:
<TABLE>
<CAPTION>
First Quarter
-------------
%
1999 1998 Increase
---- ---- --------
<S> <C> <C> <C>
Company.................. $304,150 $268,300 13.3
Franchise................ 259,600 237,050 9.5
Total Domestic........... 268,450 244,300 9.9
</TABLE>
The number of systemwide restaurants open as of April 4, 1999 and March 29, 1998
were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Company........................ 1,043 1,158
Franchise...................... 4,319 4,039
----- -----
Total Wendy's.................. 5,362 5,197
===== =====
Total Hortons.................. 1,696 1,601
===== =====
</TABLE>
COST OF SALES AND RESTAURANT OPERATING COSTS
- --------------------------------------------
The domestic Wendy's company operating margin increased in the first quarter
1999 to 15.8% versus 13.4% for 1998 primarily due to strong sales growth at
company stores, store-level productivity initiatives and the ongoing benefit of
closing and franchising underperforming company units during the first quarter
of 1998. Wendy's domestic restaurant operating costs, as a percent of retail
sales, decreased over 1998, 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 .9% in the
first quarter 1999 versus 1998. This reflected lower overall store labor costs
(as a percent of sales), even with an increase of approximately 5% in the hourly
wage rate, lower paper costs and the leveraging benefit of higher average sales.
This was partly offset by increased chicken costs. Hortons warehouse cost of
sales remained relatively constant as a percent of warehouse sales and total
costs of sales increased in line with retail sales.
9
<PAGE> 10
FRANCHISE REVENUES
- ------------------
Domestic Wendy's royalties, before reserve provisions, increased $5.6 million in
the first quarter 1999 from $33.2 million in 1998. This was partly a result of
an increase of 244 Wendy's domestic average franchise restaurants open in 1999.
Average sales of Wendy's domestic franchise restaurants increased 9.5% in the
first quarter 1999 over 1998. Average sales at Hortons Canadian restaurants
increased 10.1% resulting in increased royalty income. Franchise reserves of
$1.1 million and $561,000 were provided in the first quarter of 1999 and 1998,
respectively.
Rental income for the quarter increased $3.3 million in 1999 from $25.6 million
in 1998. This was primarily a result of more Hortons franchise leased properties
and the increased average sales at Hortons resulting in $2.5 million increased
rental income. Asset gains increased $1.7 million representing $1.2 million in
fees relating to franchisees refinancing $38 million in notes receivable owned
by the Company. Franchise fees increased $2.1 million in 1999 from $5.7 million
in 1998. This primarily represented increased Hortons franchise fees of $2.0
million as a result of more store openings.
GENERAL AND ADMINISTRATIVE EXPENSES
- -----------------------------------
General and administrative expenses for the first quarter of 1999 were $47.0
million versus $43.2 million in 1998, or 9.9% and 9.5% of total revenues,
respectively. The higher percentage for 1999 reflects the fewer domestic Wendy's
company stores as a result of stores franchised and closed during 1998. The
increase also reflects more performance-based bonus expense in 1999.
INTEREST, NET
- -------------
Interest, net increased $1.9 million to $1.7 million in the first quarter 1999
primarily reflecting a decrease in interest income as there were lower levels of
notes receivable.
INCOME TAXES
- ------------
The effective tax rate decreased to 38.0% in the first quarter 1999 from 39.5%
in 1998, reflecting the tax effects of restructuring to provide for continuing
growth at Hortons.
COMPREHENSIVE INCOME
--------------------
Comprehensive income increased primarily due to favorable movement in the
Canadian exchange rate since year-end 1998 (See Note 3).
FINANCIAL CONDITION
-------------------
The Company's financial condition continues to be very strong at the end of the
first quarter of 1999. The debt to equity and debt to total capitalization
ratios were 22% and 18%, respectively, at April 4, 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. The salad
bar removals were completed during 1998. Progress has been made in implementing
information technology systems in 1999. A total of $86 million in notes
receivable was refinanced in 1998 and 1999. The Company plans on continuing the
strategy of redeploying 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 $12.2
million was used to repurchase 487,000 common shares. A total of $223 million in
cash has been used to purchase 9.8 million shares since the repurchase program
was announced in February 1998. Capital expenditures amounted to $55 million for
1999 compared with $57 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 discounting in domestic and international markets and higher domestic
labor rates. These conditions may continue. 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.
10
<PAGE> 11
The Company currently anticipates that up to 560 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 obtain
suitable locations and financing for new restaurant development. Year-to-date
1999, there were 87 new restaurants opened. Cash flow from operations, cash and
investments on hand, existing revolving credit agreements, possible asset sales
and cash from repayment of notes receivable 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.
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 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. Of the systems modified, approximately 96% 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 these systems will be year 2000 compliant by the end of
1999.
The modifications to existing software are expected to cost approximately $4
million, of which $2.4 million has been expensed through 1998 and $210,000 has
been expensed year-to-date in 1999. The remainder will be expensed in 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 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 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 significant relationships and to discuss any
material year 2000 concerns that are identified. The Company intends to develop
contingency plans for third parties that the Company believes have material year
2000 concerns. 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 providing
information to franchisees with respect to such issues.
11
<PAGE> 12
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.
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, 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. 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.
12
<PAGE> 13
PART II: OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K.
(a) Index to Exhibits on Page 15.
(b) The Company filed one Report on Form 8-K during the first quarter 1999. The
Form 8-K filed March 17, 1999 announced quarter-to-date sales for the first
quarter of 1999, and a range of projected earnings for the first quarter and
full year 1999. A copy of the press release issued March 17, 1999 was attached.
13
<PAGE> 14
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: 05/19/99 /s/ Frederick R. Reed
---------- --------------------------------
Frederick R. Reed
Chief Financial Officer
and Secretary
14
<PAGE> 15
<TABLE>
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
<CAPTION>
Exhibit
Number Description Page No.
- ------ ----------- --------
<S> <C> <C>
27 Financial Data Schedule 16
99 Safe Harbor Under the Private Securities 17-18
Litigation Reform Act of 1995
</TABLE>
15
<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> JAN-04-1999
<PERIOD-END> APR-04-1999
<CASH> 184,899
<SECURITIES> 0
<RECEIVABLES> 89,532
<ALLOWANCES> 0
<INVENTORY> 38,623
<CURRENT-ASSETS> 334,928
<PP&E> 1,814,368
<DEPRECIATION> 520,210
<TOTAL-ASSETS> 1,822,175
<CURRENT-LIABILITIES> 204,609
<BONDS> 405,130
0
0
<COMMON> 11,964
<OTHER-SE> 1,083,365
<TOTAL-LIABILITY-AND-EQUITY> 1,822,175
<SALES> 389,320
<TOTAL-REVENUES> 476,543
<CGS> 246,439
<TOTAL-COSTS> 351,383
<OTHER-EXPENSES> 71,795
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,747
<INCOME-PRETAX> 51,618
<INCOME-TAX> 19,615
<INCOME-CONTINUING> 32,003
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,003
<EPS-PRIMARY> .26
<EPS-DILUTED> .25
</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. 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.
17
<PAGE> 2
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.
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.
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.
18
