<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 1, 2000
---------------
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 3, 2000
--------------------------------- -------------------------------
Common shares, $.10 stated value 113,762,954 shares
Exhibit index on page 16.
<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 quarters
and year-to-date periods ended October 1, 2000 and
October 3, 1999 3 - 4
Consolidated Condensed Balance Sheets as of October 1, 2000
and January 2, 2000 5 - 6
Consolidated Condensed Statements of Cash Flows for the
year-to-date periods ended October 1, 2000 and October 3, 1999 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 - 13
PART II: Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
Index to Exhibits 16
Exhibit 99 17-18
</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 1, 2000 OCTOBER 3, 1999
--------------- ---------------
<S> <C> <C>
REVENUES
Retail sales..................................... $468,414 $430,339
Franchise revenues............................... 109,182 101,841
-------- --------
577,596 532,180
-------- --------
COSTS AND EXPENSES
Cost of sales.................................... 293,321 268,772
Company restaurant operating
costs.......................................... 99,955 94,842
Operating costs.................................. 21,002 19,857
General and administrative
expenses....................................... 52,968 48,369
Depreciation and amortization
of property and equipment...................... 27,832 24,796
Other expense.................................... 899 1,585
Interest, net.................................... 3,833 2,249
------ ------
499,810 460,470
-------- --------
INCOME BEFORE INCOME TAXES........................... 77,786 71,710
INCOME TAXES......................................... 29,169 27,250
------- -------
NET INCOME........................................... $ 48,617 $ 44,460
======== ========
BASIC EARNINGS PER COMMON SHARE...................... $.43 $.37
==== ====
DILUTED EARNINGS PER COMMON SHARE.................... $.41 $.35
==== ====
DIVIDENDS PER COMMON SHARE........................... $.06 $.06
==== ====
BASIC SHARES......................................... 113,392 121,482
======= =======
DILUTED SHARES....................................... 121,316 130,739
======= =======
</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)
YEAR-TO-DATE ENDED YEAR-TO-DATE ENDED
OCTOBER 1, 2000 OCTOBER 3, 1999
--------------- ---------------
<S> <C> <C>
REVENUES
Retail sales..................................... $ 1,349,047 $ 1,240,197
Franchise revenues............................... 315,598 294,776
----------- -----------
1,664,645 1,534,973
----------- -----------
COSTS AND EXPENSES
Cost of sales.................................... 848,955 777,218
Company restaurant operating
costs.......................................... 286,424 269,957
Operating costs.................................. 60,337 57,386
General and administrative
expenses....................................... 155,699 144,169
Depreciation and amortization
of property and equipment...................... 80,278 72,439
Other expense.................................... 4,865 3,639
Interest, net.................................... 11,735 6,948
--------- ----------
1,448,293 1,331,756
----------- -----------
INCOME BEFORE INCOME TAXES........................... 216,352 203,217
INCOME TAXES......................................... 81,132 77,222
----------- ---------
NET INCOME........................................... $ 135,220 $ 125,995
=========== ===========
BASIC EARNINGS PER COMMON SHARE...................... $1.18 $1.03
===== =====
DILUTED EARNINGS PER COMMON SHARE.................... $1.14 $.99
===== ====
DIVIDENDS PER COMMON SHARE........................... $.18 $.18
==== ====
BASIC SHARES......................................... 114,501 122,887
======= =======
DILUTED SHARES....................................... 122,459 132,080
======= =======
</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 1, 2000 JANUARY 2, 2000
--------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............. $ 133,548 $ 210,785
Accounts receivable, net.............. 73,573 71,763
Notes receivable, net................. 17,018 7,749
Deferred income taxes................. 14,749 19,267
Inventories and other................. 37,760 40,271
---------- ----------
276,648 349,835
---------- ----------
PROPERTY AND EQUIPMENT.................... 2,006,029 1,937,697
Accumulated depreciation and
amortization........................ (562,985) (548,543)
---------- ----------
1,443,044 1,389,154
---------- ----------
NOTES RECEIVABLE, NET..................... 33,201 35,538
GOODWILL, NET............................. 46,191 48,306
DEFERRED INCOME TAXES..................... 11,434 22,390
OTHER ASSETS.............................. 35,428 38,374
---------- ----------
$1,845,946 $1,883,597
========== ==========
</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 1, 2000 JANUARY 2, 2000
--------------- ---------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................. $ 76,753 $ 126,487
Accrued expenses:
Salaries and wages............................ 30,848 35,214
Taxes......................................... 50,018 37,577
Insurance..................................... 37,604 37,061
Other......................................... 44,874 43,422
Current portion of long-term
obligations................................... 3,879 4,448
-------- ----------
243,976 284,209
-------- ----------
LONG-TERM OBLIGATIONS
Term debt........................................ 204,200 204,788
Capital leases................................... 47,896 44,231
------- ---------
252,096 249,019
-------- ----------
DEFERRED INCOME TAXES................................ 59,362 69,516
OTHER LONG-TERM LIABILITIES.......................... 13,194 15,414
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:
135,258,000 and 134,856,000 shares,
respectively................................. 11,981 11,941
Capital in excess of stated value................ 404,495 398,580
Retained earnings................................ 1,183,357 1,068,883
Accumulated other comprehensive expense.......... (29,558) (14,443)
------------ ------------
1,570,275 1,464,961
Treasury stock at cost: 21,978,000 and
16,626,000 shares, respectively................ (492,957) (399,522)
------------ ------------
1,077,318 1,065,439
----------- -----------
$1,845,946 $1,883,597
========== ==========
</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)
YEAR-TO-DATE YEAR-TO-DATE
ENDED ENDED
OCTOBER 1, 2000 OCTOBER 3, 1999
--------------- ---------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING
ACTIVITIES....................................... $209,451 $208,818
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from asset dispositions................. 40,688 84,231
Capital expenditures............................. (214,313) (185,020)
Acquisition of franchises........................ (1,555) (1,355)
Payments on notes receivable..................... 4,369 100,468
Other investing activities....................... (2,729) 1,530
-------- --------
Net cash used in investing
activities.................................... (173,540) (146)
--------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock........... 4,513 21,588
Repurchase of common shares...................... (93,435) (126,681)
Principal payments on long-term
obligations.................................... (3,481) (3,590)
Dividends paid on common and
exchangeable shares............................ (20,745) (22,133)
-------- --------
Net cash used in financing activities.......... (113,148) (130,816)
-------- --------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ........................................ (77,237) 77,856
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD ............................................. 210,785 160,743
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........... $133,548 $238,599
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid.................................... $18,231 $ 18,547
Capitalized lease obligations incurred........... 7,600 3,786
Income taxes paid................................ 69,431 66,226
Acquisition of franchises:
Fair value of assets acquired, net............. 1,555 1,355
Cash paid...................................... 1,555 1,355
</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 1,
2000 and January 2, 2000 and the condensed results of operations and
comprehensive income (see Note 3) for the quarters and year-to-date periods
ended October 1, 2000 and October 3, 1999 and cash flows for the
year-to-date periods ended October 1, 2000 and October 3, 1999. The Notes
to the audited Consolidated Financial Statements which are contained in the
Financial Statements and Other Information furnished with the Company's
2000 Proxy Statement should be read in conjunction with these Consolidated
Condensed Financial Statements.
NOTE 2. NET INCOME PER SHARE
Basic earnings per common share are computed by dividing net income
available to common shareholders by the weighted average number of common
shares outstanding. Diluted computations include assumed conversions of
stock options, net of shares repurchased from proceeds, and
company-obligated mandatorily redeemable preferred securities, when
dilutive, and the elimination of related expenses, net of income taxes.
Options to purchase 6.4 million shares of common stock in the current
quarter and year-to-date, and 1.8 million and 3.6 million shares in the
prior year quarter and year-to-date, were not included in the computation
of diluted earnings per common share. Because the exercise price of these
options was greater than the average market price of the common shares in
the respective periods, they are excluded from the calculation due to the
antidilutive effect.
The computations of basic and diluted earnings per common share are shown
below:
<TABLE>
<CAPTION>
QUARTER QUARTER YEAR-TO-DATE YEAR-TO-DATE
ENDED ENDED ENDED ENDED
OCT. 1, 2000 OCT. 3, 1999 OCT. 1, 2000 OCT. 3, 1999
------------ ------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Income for computation of basic earnings
per common share............................ $48,617 $44,460 $135,220 $125,995
Interest savings (net of taxes) on assumed
conversions................................. 1,585 1,572 4,755 4,717
------- ------- ------- -------
Income for computation of diluted
earnings per common share................... $50,202 $46,032 $139,975 $130,712
======= ======= ======== ========
Weighted average shares for computation
of basic earnings per common share.......... 113,392 121,482 114,501 122,887
Dilutive stock options........................ 351 1,684 385 1,620
Assumed conversions........................... 7,573 7,573 7,573 7,573
------- ------- ------- -------
Weighted average shares for computation
of diluted earnings per common share........ 121,316 130,739 122,459 132,080
======= ======= ======= =======
Basic earnings per common share............... $.43 $.37 $1.18 $1.03
==== ==== ===== =====
Diluted earnings per common share............. $.41 $.35 $1.14 $ .99
==== ==== ===== ======
</TABLE>
8
<PAGE> 9
NOTE 3. CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
The components of other comprehensive income (expense) and total comprehensive
income are shown below:
<TABLE>
<CAPTION>
QUARTER QUARTER YEAR-TO-DATE YEAR-TO-DATE
ENDED ENDED ENDED ENDED
OCT. 1, 2000 OCT. 3, 1999 OCT. 1, 2000 OCT. 3, 1999
------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Net income........................................... $48,617 $44,460 $135,220 $125,995
Other comprehensive income (expense):
Translation adjustments.............................. (6,559) 2,272 (14,337) 12,947
Other (net of taxes of $68 and $388 for the
quarter and year-to-date periods ended
October 3, 1999)................................... - (85) - (487)
------- -------- -------- --------
(6,559) 2,187 (14,337) 12,460
------- ------- --------- --------
Comprehensive income................................. $42,058 $46,647 $120,883 $138,455
======= ======= ======== ========
</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
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 OCT. 1, 2000
Revenues $ 405,705 $133,550 $ 38,341 $ 577,596
Income before income taxes 72,940 29,710 3,143 105,793
Capital expenditures 54,653 17,850 5,280 77,783
QUARTER ENDED OCT. 3, 1999
Revenues $ 377,950 $116,085 $ 38,145 $ 532,180
Income before income taxes 72,554 23,573 229 96,356
Capital expenditures 49,455 17,264 4,251 70,970
YEAR-TO-DATE ENDED OCT. 1, 2000
Revenues $1,175,696 $380,766 $108,183 $1,664,645
Income before income taxes 210,627 83,309 6,120 300,056
Capital expenditures 142,787 55,394 16,132 214,313
YEAR-TO-DATE ENDED OCT. 3, 1999
Revenues $1,097,759 $338,169 $ 99,045 $1,534,973
Income before income taxes 209,763 63,473 955 274,191
Capital expenditures 121,940 51,719 11,361 185,020
</TABLE>
A reconciliation of reportable segment income before income taxes to
consolidated income before income taxes follows:
<TABLE>
<CAPTION>
QUARTER QUARTER YEAR-TO-DATE YEAR-TO-DATE
ENDED ENDED ENDED ENDED
OCT. 1, 2000 OCT. 3, 1999 OCT. 1, 2000 OCT. 3, 1999
------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Income before income taxes.............................. $105,793 $96,356 $300,056 $274,191
Corporate charges....................................... (28,007) (24,646) (83,704) (70,974)
------- ------- ---------- ----------
Consolidated income before income taxes............... $ 77,786 $71,710 $216,352 $203,217
========= ======= ======== ========
</TABLE>
Corporate charges include certain overhead costs and net interest expense.
9
<PAGE> 10
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's diluted earnings per common share increased 17.1% to $.41 in the
current quarter, and 15.2% to $1.14 in the year-to-date period. In the quarter,
total revenues increased 8.5% to $578 million and systemwide sales increased
8.9% to $2.0 billion. Year-to-date, revenues increased 8.4% to $1.7 billion and
systemwide sales increased 9.1% to $5.8 billion. Average same-store sales
increased for Wendy's domestic stores, Hortons Canada and Hortons U.S. during
the quarter.
RETAIL SALES
Retail sales for the third quarter 2000 increased $38.1 million, or 8.8%, to
$468.4 million and increased $108.9 million, or 8.8%, to $1.3 billion for
year-to-date 2000. Average restaurant sales increased 1.9% for the third quarter
and 2.3% year-to-date in Wendy's domestic company restaurants. Average
same-store sales in Wendy's domestic company restaurants increased 2.8% in the
third quarter and 3.0% year-to-date. Average domestic Wendy's transaction counts
were down .4% for the third quarter and up .3% year-to-date 2000. Domestic
selling price increased 2.0% in the third quarter and 1.3% year-to-date 2000.
Hortons warehouse sales (sales of dry goods to franchisees) for the third
quarter increased 22.6%, or $13.0 million, to $70.7 million and 18.2%, or $30.7
million to $199.0 million year-to-date. This increase was primarily the result
of the development of new stores by Hortons Canada and average same-store sales
increases (in local currency) of 8.9% in the quarter and 9.2% year-to-date.
International Wendy's retail sales increased 3.6% to $32.8 million in the
quarter and 13.4% to $92.6 million year-to-date. The increases in both periods
reflect the conversion of Argentina to a company operated market mid-third
quarter 1999 and additional company store development in Canada.
Average sales per domestic Wendy's restaurant for the quarter and year-to-date
periods ended October 1, 2000 and October 3, 1999 were as follows:
<TABLE>
<CAPTION>
THIRD QUARTER YEAR-TO-DATE
------------- ------------
% %
2000 1999 INCREASE 2000 1999 INCREASE
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Company........................ $339,750 $333,400 1.9 $989,300 $967,450 2.3
Franchise........................ 293,750 287,200 2.3 849,000 829,400 2.4
Total Domestic.................. 302,975 296,300 2.2 877,225 856,750 2.4
</TABLE>
The number of systemwide restaurants open as of October 1, 2000 and October 3,
1999 was as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Company............................... 1,135 1,080
Franchise............................. 4,543 4,351
----- -----
Total Wendy's......................... 5,678 5,431
===== =====
Total Hortons......................... 1,895 1,751
===== =====
Total System.......................... 7,573 7,182
===== =====
</TABLE>
10
<PAGE> 11
COST OF SALES AND RESTAURANT OPERATING COSTS
The third quarter domestic Wendy's company operating margin was even with 1999
at 16.8% and decreased .1% from 16.8% for the year-to-date comparison. In the
quarter, Wendy's domestic company restaurant cost of sales increased 8.7% to
$199.8 million and increased 9.0% to $581.4 million for the year-to-date period.
Wendy's domestic company restaurant cost of sales, as a percent of sales, was
even with the prior year in the quarter and .4% higher year-to-date. There were
higher labor costs in both periods and higher food costs in the year-to-date
period. Beef prices increased 1.0% in the quarter and 7.5% year-to-date. Average
labor rates increased 4.6% in the quarter and 5.2% year-to-date. These increases
were partly offset by productivity enhancements in the restaurants.
In the quarter, Wendy's domestic company restaurant operating costs increased
8.3% to $85.8 million and increased 7.2% to $244.3 million for the year-to-date
period. The significant increases in the quarter included salaries, utilities,
insurance and rent. These increases were partly offset by a reduction in pension
costs reflecting the current plan structure. Year-to-date, salaries, utilities
and maintenance were higher, partly offset by reduced pension and bonus expense.
Wendy's domestic company restaurant operating costs, as a percent of sales, were
even with the prior year in the quarter and .3% lower year-to-date.
Hortons Canada warehouse cost of sales increased $10.0 million in the quarter
and $23.3 million year-to-date, reflecting Hortons' additional development and
higher average sales per restaurant. Warehouse cost of sales as a percent of
warehouse sales also improved in the current year.
International Wendy's cost of sales increased 3.8% to $20.6 million in the
quarter and 13.6% to $58.9 million in the year-to-date period. The increases in
both periods reflect additional company store development in Canada and the
increase in the year-to-date also includes the conversion of Argentina to a
company market.
FRANCHISE REVENUES
Domestic Wendy's royalties, before reserve provisions, increased $2.9 million in
the third quarter 2000 to $46.5 million. In the third quarter, an average of 159
more Wendy's domestic franchise restaurants were open and average sales of
Wendy's domestic franchise restaurants increased 2.3% over 1999. Year-to-date,
domestic royalties before reserves increased $7.9 million to $133.0 million in
2000. This reflected an average of 146 more franchise restaurants and an
increase in average sales of Wendy's domestic franchise restaurants of 2.4%.
Average same-store sales at Hortons Canadian restaurants increased 8.9% (in
local currency) for the third quarter 2000 and 9.2% year-to-date resulting in
increased royalty income of $1.4 million for the quarter and $4.8 million
year-to-date. International royalties were $4.3 million and $12.1 million in the
quarter and year-to-date, respectively. International royalties increased 11.1%
in the quarter and increased 7.1% year-to-date. Franchise reserves of $801,000
and $1.1 million were provided year-to-date 2000 and 1999, respectively.
Asset gains in franchise revenues for the third quarter 2000 included $38,000 in
pretax gains from franchising Wendy's restaurants, versus $700,000 in 1999, and
$1.1 million in pretax gains realized from the sale of rental properties versus
$1.9 million in 1999. Asset gains for year-to-date 2000 included $2.3 million in
pretax gains from franchising Wendy's restaurants, versus $7.6 million in 1999,
and $4.6 million in pretax gains realized from the sale of rental properties,
versus $3.2 million in 1999. The prior year also included $1.7 million
year-to-date in fee income related to refinancing notes receivable.
Rental income for the quarter increased $4.6 million to $38.1 million and
increased $10.8 million year-to-date 2000 to $107.5 million. This was primarily
a result of more Hortons Canadian franchise leased properties and the increased
average sales at Hortons resulting in increased rental income of $5.7 million in
the third quarter and $14.1 million year-to-date. Wendy's rental income
decreased in the year-to-date period, reflecting the sale of rental properties
throughout 1999 and 2000.
11
<PAGE> 12
OPERATING COSTS
Operating costs for the third quarter 2000 increased $1.1 million to $21.0
million and increased $3.0 million to $60.3 million for the year-to-date. Both
periods reflect the growth in the number of properties being leased and then
subleased to franchisees by Hortons. In the quarter, Hortons Canada had an
increase in rent expense and warehouse operating costs. This was partly offset
by lower equipment costs for Hortons in the current quarter as fewer stores were
franchised. In the year-to-date, Hortons also had higher rent and distribution
costs compared to the prior year. This was partly offset by reduced rent expense
in the International Wendy's as a result of Argentina being converted from a
franchise market to a company operated market. Therefore, the International
Wendy's rent expense is currently included in restaurant operating costs.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the third quarter 2000 were $53.0
million versus $48.4 million in 1999, or 9.2% and 9.1% of total revenues,
respectively. Year-to-date 2000 general and administrative costs were $155.7
million and 9.4% of total revenues compared with $144.2 million and 9.4% of
total revenues in 1999. The expense increase includes salaries and benefits and
software maintenance costs to support the growth in profitability, partly offset
by expenditures required in the prior year for year 2000 technology
preparedness.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses for both the quarter and year-to-date
periods increased over 1999 due to the implementation of the Company's new
enterprise-wide information technology initiatives and additional store growth.
INTEREST, NET
Net interest increased $1.6 million to $3.8 million in the third quarter 2000
and increased $4.8 million to $11.7 million for the year-to-date comparison.
This primarily reflects a decrease in interest income as cash was reduced by
share repurchases and lower levels of notes receivable outstanding.
COMPREHENSIVE INCOME
Comprehensive income decreased $4.6 million in the quarter and $17.6 million
year-to-date. This was due to unfavorable movement in the Canadian exchange rate
(see Note 3).
FINANCIAL CONDITION
The Company's financial condition continues to be very strong at the end of the
third quarter of 2000. The long-term debt to equity and debt-to-total
capitalization ratios were 23% and 19%, respectively, at October 1, 2000. The
Company has implemented a program to maximize return on assets over the long
term by redeploying assets to opportunities that have higher potential returns.
A total of 278 rental properties have been sold and a total of $143 million in
notes receivable have been refinanced since 1998. The Company plans on
continuing the strategy of improving return on assets. During the quarter, cash
of $6.3 million was used to repurchase 333,800 common shares. A total of $491
million in cash has been used to purchase 21.9 million shares since 1998.
Capital expenditures amounted to $214 million for 2000 compared with $185
million for 1999. The Company intends to continue to invest in technology
initiatives to improve data gathering, communications and operating efficiency.
The Company also intends to continue new store development and to make
improvements to existing facilities. The Company continues to focus on effective
capital allocation and improving returns.
OUTLOOK
The Company continues to employ its strategic initiatives as outlined in the
Financial Statements and Other Information furnished with the Company's 2000
Proxy Statement. These initiatives include growing same-store sales, improving
store-level productivity to increase margins, disposing of underperforming
restaurants, writing down underperforming and non-recoverable assets,
accelerating restaurant development in North America and repurchasing common
shares. The Company's long-term goal for EPS growth continues to be in the 12%
to 15% range, excluding asset gains and unusual items.
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The Company currently anticipates that more than 500 new Wendy's and Hortons
restaurants could be opened systemwide (both company and franchise) during 2000,
subject to the continued ability of the Company and its franchisees to complete
permitting and meet other conditions and to comply with other regulatory
requirements for the completion of stores and to obtain financing for new
restaurant development. Year-to-date 2000, there have been 309 new restaurants
opened.
While the majority of international business outside North America continues to
be through franchising, last year the Company acquired the Wendy's restaurants
in Argentina. Although international operations excluding Argentina are
profitable, performance in the Argentine market continues to be weak, with a
year-to-date pretax operating loss of $3.2 million. There are currently 18
company operated restaurants in Argentina. The Argentine market faces difficult
economic and competitive conditions. The ability to improve results is dependent
on increasing sales. The Company has implemented its Service Excellence program
in the restaurants and initiated new marketing and pricing programs in an effort
to increase customer traffic and reverse a trend of declining sales. The Company
is conducting a review of its investment in Argentina and is evaluating a range
of strategic alternatives. In the United States, Hortons is a new concept in the
investment phase and not currently profitable.
Cash flow from operations, cash and investments on hand, possible asset sales,
and cash available through existing revolving credit agreements and through the
possible issuance of securities should provide for the Company's projected cash
requirements, including cash for capital expenditures, future acquisitions of
restaurants from franchisees, stock repurchases or other corporate purposes.
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 materially impact the Company's
financial statements.
In the third quarter 2000, the Company adopted Emerging Issues Task Force (EITF)
00-14, "Accounting for Certain Sales Incentives." This statement is effective
for the fourth quarter of fiscal years beginning after December 15, 1999. EITF
00-14 requires that coupons and discounts be recorded as a reduction of revenue.
This change reduces retail sales and company restaurant operating costs by equal
amounts and therefore does not have an impact on net income. Prior quarters and
years have been reclassified to reflect the adoption of EITF 00-14.
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; and other factors set
forth in Exhibit 99 attached hereto.
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PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Index to Exhibits on Page 16.
(b) The Company filed two Reports on Form 8-K during the third quarter 2000.
The Form 8-K filed August 9, 2000 announced that Kerrii B. Anderson had
been named as Executive Vice President and Chief Financial Officer of the
Company. A copy of the press release issued August 9, 2000 was attached.
The Form 8-K filed September 20, 2000 announced the promotions of three
executives and the formation of a strategic planning team. A copy of the
press release issued September 20, 2000 was attached.
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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: 11/13/00 /s/ KERRII B. ANDERSON
--------- ------------------------------------
Kerrii B. Anderson
Executive Vice President and
Chief Financial Officer
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WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
NUMBER DESCRIPTION PAGE NO.
------ ----------- --------
<S> <C> <C>
99 Safe Harbor Under 17-18
the Private Securities
Litigation Reform Act of 1995
</TABLE>
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