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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended January 2, 1994
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( ) TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission File Number: 1-8116
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WENDY'S INTERNATIONAL, INC.
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(Exact name of Registrant as specified in its charter)
Ohio 31-0785108
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(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
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 614-764-3100
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
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Common Shares, $.10 stated value New York, Boston, Cincinnati, Midwest,
(100,987,000 shares outstanding Pacific, and Philadelphia
at March 7, 1994) Stock Exchanges
7% Convertible Subordinated
Debentures, due 2006 New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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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 .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 7, 1994 was $1,671,212,000.
Documents incorporated by reference:
Portions of the Definitive Proxy Statement dated March 11, 1994 are incorporated
by reference into Part III.
Exhibit index on pages 33 and 34.
1 of 53
PART I
Item 1. Business
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The Company
Wendy's International, Inc. was incorporated in 1969 under the laws of the State
of Ohio. Wendy's International, Inc. and its subsidiaries are collectively
referred to herein as the "Company."
The Company is primarily engaged in the business of operating, developing, and
franchising a system of distinctive quick-service restaurants. At January 2,
1994, there were 4,168 Wendy's restaurants in operation in the United States and
in 30 other countries and territories. Of these restaurants, 1,224 were operated
by the Company and 2,944 by the Company's franchisees.
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Operations
Each Wendy's restaurant offers a relatively standard menu featuring hamburgers
and filet of chicken breast sandwiches, which are prepared to order with the
customer's choice of condiments. Wendy's menu also includes a salad bar, chili,
baked and french fried potatoes, prepared salads, desserts, soft drinks and
other non-alcoholic beverages, and a child's meal. In addition, the restaurants
sell a variety of promotional products on a limited basis.
The Company strives to maintain quality and uniformity throughout all Wendy's
restaurants by publishing detailed specifications for food products,
preparation, and service by continual in-service training of employees, and by
field visits from Company supervisors. In the case of franchisees, field visits
are made by Company personnel who review operations and make recommendations to
assist in compliance with Company specifications.
Generally, the Company does not sell food or supplies to its franchisees.
However, the Company has arranged for volume purchases of many of these
products. Under the purchasing arrangements, independent distributors purchase
certain products directly from approved suppliers, and store and sell them to
local company and franchised restaurants. These programs help assure
availability of products and provide quantity discounts, quality control, and
efficient distribution. These advantages are available both to the Company and
to any franchisees who choose to participate in the distribution program.
The New Bakery Co. of Ohio, Inc., (Bakery) a wholly-owned subsidiary of the
Company, is a producer of buns for Wendy's restaurants. At January 2, 1994, the
Bakery supplied 662 restaurants operated by the Company and 1,048 restaurants
operated by franchisees. At the present time, the Bakery does not manufacture or
sell any other products.
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Raw Materials
The Company and its franchisees have not experienced any material shortages of
food, equipment, fixtures, or other products which are necessary to restaurant
operations. The Company anticipates no such shortages of products and, in any
event, alternate suppliers are available.
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Trademarks and Service Marks of the Company
The Company has registered certain trademarks and service marks in the United
States Patent and Trademark office and in international jurisdictions, some of
which include "Wendy's", "Wendy", "Old Fashioned Hamburgers", and "Quality Is
Our Recipe". The Company believes that these and other related marks are of
material importance to the Company's business. Domestic trademarks and service
marks expire at various times from 1994 to 2011, while international trademarks
and service marks have various durations of 5 to 20 years. The Company generally
intends to renew trademarks and service marks which expire.
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Seasonality
The Company's business is moderately seasonal. Average restaurant sales are
normally higher during the summer months than during the winter months.
2
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Working Capital Practices
Cash from operations, along with cash and short-term investments on hand, should
enable the Company to meet its financing requirements. In addition, the Company
has available unused lines of credit. It is a normal practice within the quick-
service restaurant industry to maintain a relatively low current ratio. The
Company's current ratio is somewhat higher than historical levels as a result of
a debt offering in 1991.
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Competition
Wendy's is one of the largest food service organizations in the world. Each
Company and franchised restaurant is in competition with other food service
operations within the same geographical area. The quick-service restaurant
industry is highly competitive. The Company competes with other 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, and effectiveness of marketing are also important
factors. The price charged for each menu item may vary from market to market
depending on competitive pricing and the local cost structure.
The Company's competitive position is enhanced by its use of fresh ground beef,
its unique and diverse menu, promotional products, its wide choice of
condiments, and the atmosphere and decor of its restaurants.
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Research and Development
The Company engages in research and development on an ongoing basis, testing new
products and procedures for possible introduction into the Wendy's system. While
research and development operations are considered to be of prime importance to
the Company, amounts expended for these activities are not deemed material.
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Government Regulations
A number of states have enacted legislation which, together with rules
promulgated by the Federal Trade Commission, affect companies involved in
franchising. Much of the legislation and rules adopted have been aimed at
requiring detailed disclosure to a prospective franchisee and periodic
registration by the franchisor with state administrative agencies. Additionally,
some states have enacted, and others have considered, legislation which governs
the termination or non-renewal of a franchise agreement and other aspects of the
franchise relationship. The United States Congress has also considered
legislation of this nature. The Company has complied with requirements of this
type in all applicable jurisdictions. The Company cannot predict the effect on
its operations, particularly on its relationship with franchisees, of future
enactment of additional legislation. Various other government initiatives such
as health care issues, minimum wage rates, and taxes can all have a significant
impact on the company's performance.
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Environment and Energy
Various federal, state, and local regulations have been adopted which affect the
discharge of materials into the environment or which otherwise relate to the
protection of the environment. The Company does not believe that such
regulations will have a material effect on its capital expenditures, earnings,
or competitive position. The Company cannot predict the effect of future
environmental legislation or regulations.
The Company's principal sources of energy for its operations are electricity and
natural gas. To date, the supply of energy available to the Company has been
sufficient to maintain normal operations.
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Acquisitions and Dispositions
The Company has from time to time acquired the interests of and sold restaurants
to franchisees, and it is anticipated that the Company may have opportunities
for such transactions in the future. The Company generally retains a right of
first refusal in connection with any proposed sale of a franchisee's interest.
The Company will continue to sell and acquire restaurants in the future where
prudent.
See Notes 6 and 7 under Item 8 on pages 22 and 23 of this Form 10-K for further
information regarding acquisitions and dispositions.
3
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International Operations
Markets in Canada are currently being developed for both company-owned and
franchised restaurants. In addition to the countries and territories listed
under Item 2 on page 6 of this Form 10-K, the Company has granted development
rights for Bahrain, Egypt, Morocco, Oman, Poland, Qatar, Tunisia, and the Yemen
Arab Republic.
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Franchised Wendy's Restaurants
As of January 2, 1994, the Company's franchisees operated 2,944 Wendy's
restaurants in 49 states, the District of Columbia, and 30 other countries and
territories.
The rights and franchises currently offered by the Company in the United States
are contained in one basic document, the Restaurant Franchise Agreement. This
document gives the franchisee the right to construct, own, and operate a Wendy's
restaurant upon a site accepted by Wendy's and to use the Wendy's system in
connection with the operation of the restaurant at that site.
Wendy's has in the past franchised under different agreements on a multi-unit
basis; however, now it is generally the intent of the Company to grant new
franchises both in the United States and foreign countries on a unit-by-unit
basis.
After having submitted to Wendy's the requested application and financial
materials, if initially approved by Wendy's, an individual becomes an approved
applicant upon the execution of a Preliminary Letter Agreement. This Preliminary
Letter Agreement does not guarantee that the applicant will be accepted as a
Wendy's franchisee but entitles the applicant to commence a training program,
intended to allow both parties the opportunity to more carefully assess a long-
term franchise relationship. For existing franchisees who in Wendy's opinion are
not in need of additional training, the Preliminary Letter Agreement may not be
necessary. Upon the execution of a Preliminary Letter Agreement, the applicant
is required to pay a non-refundable fee of $5,000 to help defray the cost of the
approval process and the initial training.
The Restaurant Franchise Agreement requires that the franchisee pay a royalty of
4% of gross receipts from the operation of the restaurant. The Agreement also
typically requires that the franchisee pay the Company a technical assistance
fee. In the United States, the technical assistance fee required under newly
executed Restaurant Franchise Agreements is currently $25,000 for each
restaurant.
The technical assistance fee is used to defray the cost to the Company of
providing to its franchisees site selection assistance, standard construction
plans, specifications and layouts, review of specific restaurant site plans,
certain training in the Company's restaurant systems, and certain bulletins,
brochures, and reports. The Company does not select or employ personnel on
behalf of the franchisees.
The rights and franchises currently offered for International development are
contained in the Franchise Agreement which is issued upon approval of a
restaurant site. The Franchise Agreement is for an initial term of 20 years or
the term of the lease for the restaurant site, whichever is shorter. The
Franchise Agreement licenses the franchisee to use the Company's trademarks and
know-how in the operation of the restaurant. Upon execution of the Franchise
Agreement, the franchisee is required to pay a Technical Assistance Fee.
Generally, the Technical Assistance Fee is $30,000 for each restaurant.
Currently, the franchisee is required to pay a monthly continuing fee based on
the gross sales of the restaurant, usually 4%.
See Schedule VII on page 31 of this Form 10-K, and Management's Discussion and
Analysis of Financial Condition and Results of Operations under Item 7 on pages
10 through 13 and Note 8 under Item 8 on page 23 of this Form 10-K for further
information regarding reserves, commitments, and contingencies involving
franchisees.
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Advertising and Promotions
Products sold by Wendy's restaurants are advertised through television, radio,
newspapers, and a variety of promotional campaigns. The Company attempts to keep
franchisees informed of current advertising techniques and effective promotions.
The Company's advertising materials are also made available to the franchisees.
The Restaurant Franchise Agreement provides that franchisees will spend 4% of
their gross receipts for advertising and promotions. Currently, the Restaurant
Franchise Agreement specifies 2% is to be spent on local and regional
advertising (including in many cases cooperative advertising), and 2% is the
required contribution to The Wendy's National Advertising Program, Inc. (WNAP).
In 1992 and 1993, a systemwide vote was taken on a proposal to increase national
advertising during the following calendar year. This voluntary program
reallocates the 4% required minimum advertising expenditures such that 2 1/2%
goes toward national advertising and 1 1/2% toward local
4
advertising during 1993 and 1994. In 1994, these minimum requirements will
revert back to 2% for national and 2% for local advertising unless a new
systemwide vote approves reallocation for 1995. Wendy's also has the ability to
increase in the future the required local expenditure to 3%, for a total of 5%
under the Restaurant Franchise Agreement, provided Wendy's is spending 5% for
all domestic Company-operated restaurants and provided Wendy's enforces this
requirement on a national basis for all franchisees who have signed that
agreement. During fiscal 1993, 1992, and 1991, approximately $86 million, $67
million, and $57 million, respectively, were spent on advertising, promotions,
and related expenses by WNAP. WNAP is a not-for-profit corporation which was
established to collect and administer the funds contributed by the Company and
all domestic franchisees. WNAP's Trustees are comprised of representatives of
both the Company and its franchisees.
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Personnel
As of January 2, 1994, the Company employed approximately 43,000 people, of whom
approximately 42,000 were employed in company-operated restaurants. The total
number of full-time employees at that date was approximately 7,000. The Company
believes that its employee relations are satisfactory. The Company is not a
party to any collective bargaining agreements except for (i) an agreement with a
labor union which represents certain employees of the Bakery, and (ii) two
agreements with unions which represent certain employees at two of the Company's
Canadian restaurants.
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Item 2. Properties
Wendy's restaurants are built to Company specifications as to exterior style and
interior decor. The majority are free-standing, one-story brick buildings,
substantially uniform in design and appearance, constructed on sites of
approximately 40,000 square feet, with parking for approximately 45 cars. Some
restaurants, located in downtown areas or shopping malls, are of a store-front
type and vary according to available locations but generally retain the standard
sign and interior decor. The typical new free-standing restaurant contains about
2,800 square feet and has a cooking area, a dining room capacity for 90 persons,
and a double pick-up window for drive-thru service. The restaurants are
generally located in urban or heavily populated suburban areas, and their
success depends upon serving a large number of customers. Wendy's also operates
restaurants in special site locations such as hospitals, an airport, and college
campuses.
At January 2, 1994, the Company and its franchisees operated 4,168 Wendy's
restaurants in the locations listed under Item 2 on page 6 of this Form 10-K. Of
the 1,224 company-operated Wendy's restaurants, the Company owned the land and
building for 567 restaurants, owned the building and held long-term land leases
for 248 restaurants, and held leases covering land and building for 409
restaurants. The Company's land and building leases are generally written for
terms of 20 to 25 years with one or more five-year renewal options. In certain
lease agreements the Company has the option to purchase the real estate. Certain
leases require the payment of additional rent equal to a percentage (ranging
from 1% to 10%) of annual sales in excess of specified amounts. Some of the real
estate owned by the Company is subject to mortgages which mature over various
terms. Surplus land and buildings are generally held for sale.
The Company also owns land and buildings for 245 restaurant locations which it
in turn leases to certain of its franchisees.
The Company owns approximately 37.6 acres of land in Dublin, Ohio on which are
located the Company's corporate headquarters. This complex contains
approximately 200,000 square feet of office space.
5
Domestic Wendy's
State Company Franchise
Alabama -- 74
Alaska -- 8
Arizona 41 10
Arkansas -- 34
California 20 172
Colorado 35 50
Connecticut -- 31
Delaware 18 --
Florida 159 118
Georgia 63 119
Hawaii -- 2
Idaho -- 15
Illinois 92 99
Indiana 1 127
Iowa -- 33
Kansas -- 50
Kentucky 14 69
Louisiana 32 18
Maine -- 8
Maryland -- 81
Massachusetts 23 18
Michigan 38 138
Minnesota 26 20
Mississippi 19 35
Missouri -- 78
Montana -- 10
Nebraska -- 26
Nevada -- 29
New Hampshire -- 15
New Jersey 2 60
New Mexico -- 21
New York -- 140
North Carolina 54 95
North Dakota -- 6
Ohio 205 121
Oklahoma -- 37
Oregon 22 24
Pennsylvania 60 116
Rhode Island -- 6
South Carolina -- 63
South Dakota -- 8
Tennessee -- 130
Texas 87 145
Utah -- 25
Vermont -- 6
Virginia 54 83
Washington 39 10
West Virginia 28 22
Wisconsin -- 41
Wyoming -- 10
District of Columbia -- 3
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1,132 2,659
===== =====
International Wendy's
Country/Territory Company Franchise
Aruba -- 2
Bahamas -- 3
Canada 92 72
Cayman Islands -- 1
Dominican Republic -- 2
El Salvador -- 3
Greece -- 8
Guam -- 2
Guatemala -- 3
Honduras -- 3
Hong Kong -- 4
Hungary -- 1
Iceland -- 1
Indonesia -- 8
Italy -- 2
Japan -- 35
Kuwait -- 3
Mexico -- 9
New Zealand -- 4
Philippines -- 22
Puerto Rico -- 18
Saudi Arabia -- 16
South Korea -- 35
Switzerland -- 3
Taiwan -- 14
Thailand -- 1
Turkey -- 4
United Arab Emirates -- 1
United Kingdom -- 2
Virgin Islands -- 3
-- ---
92 285
== ===
6
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Item 3. Legal Proceedings
On May 26, 1989, Jonathan Raven and Eli Shapiro, individually and purportedly on
behalf of a putative class of other persons similarly situated, filed a
complaint against the Company and others in the U.S. District Court for the
Northern District of Illinois, Eastern Division. The complaint, insofar as it
pertains to the Company, alleges violations of Section 10(b) of the Securities
Exchange Act of 1934, Rule 10b-5 of the Securities and Exchange Commission
promulgated thereunder, and the common law. The plaintiffs claim to be investors
in a limited partnership which was a franchisee of the Company. The partnership
was formed in 1985 to purchase from the Company restaurants located in
Washington and Oregon. The purchase was funded in part by the offering of
limited partnership interests and revenue sensitive subordinated notes to the
investors. The offering was concluded in 1986. The complaint seeks compensatory
damages in the amount of $18 million, attorneys fees and rescission of the
purchases of limited partnership interests and revenue sensitive subordinated
notes sold in the offering. The Company obtained releases from 82% of the
potential plaintiffs. The remaining potential plaintiffs have not been certified
as a class. The case was transferred upon motion of the defendants to the U.S.
District Court in Atlanta, Georgia. The defendants' motion to dismiss the
federal claims was granted with prejudice on October 9, 1991. The defendants'
motion to dismiss the state claim was granted without prejudice on the same day.
The plaintiffs filed a motion for reinstatement of their Section 10(b), Rule
10b-5 and common law claims on February 14, 1992. That motion was granted on
September 24, 1992. The defendants subsequently filed a motion to permit an
interlocutory appeal and renewed their motion to dismiss the Section 10(b) and
Rule 10b-5 claims for reasons the court had not yet considered. The motion is
under consideration by the court. The Company intends to defend the action
vigorously and believes that it has meritorious defenses to the claims sought to
be asserted and that the resolution of the action will not materially affect the
Company's financial condition. This case was last referenced in the Company's
Form 10-K for the year ended January 3, 1993.
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Item 4. Submission of Matters to a Vote of Security Holders
None.
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Executive Officers of the Registrant
Name Age Position with Company Officer Since
R. David Thomas 61 Senior Chairman of the Board 1969
and Founder
James W. Near 55 Chairman of the Board and 1986
Chief Executive Officer
Gordon F. Teter 50 President and Chief Operating 1987
Officer, Director
John K. Casey 61 Vice Chairman and Chief 1981
Financial Officer, Director
Ronald E. Musick 53 Executive Vice President, 1986
Director
Edwin L. Ourant 61 Executive Vice President, 1986
President --
Wendy's Restaurants of Canada
Inc.
Charles W. Rath 57 Executive Vice President 1987
George Condos 40 Executive Vice President 1982
Donald A. Meyer 43 Senior Vice President 1993
John W. Wright 46 Senior Vice President and 1993
President --
International Division
John T. Schuessler 43 Senior Vice President 1983
Raymond A. Serina 52 Senior Vice President 1990
Lawrence A. Laudick 46 Vice President, General 1981
Controller &
Assistant Secretary
Lawrence E. Schauf 48 Senior Vice President, General 1987
Counsel & Secretary
Stephen D. Farrar 43 Senior Vice President 1983
John F. Brownley 51 Senior Vice President and 1981
Treasurer
Jack C. Whiting 44 Senior Vice President 1992
Brion G. Grube 42 Senior Vice President -- 1990
Wendy's Restaurants of Canada
Inc.
7
No arrangements or understandings exist pursuant to which any person has been,
or is to be, selected as an officer, except in the event of a change in control
of the Company, as provided in the Company's Key Executive Agreements. The
executive officers of the Company are appointed by the Board of Directors.
With the exception of Messrs. Near, Casey, Teter, Musick, Condos, Serina,
Whiting, Schauf, Farrar, Grube, Meyer, and Wright each of the above individuals
has held the same principal occupation with the Company for at least the last
five years.
Mr. Near was President and Chief Operating Officer of Sisters International,
Inc. from 1981 until 1986, when he assumed the position of President and Chief
Operating Officer of the Company. He assumed the duties of Chief Executive
Officer in 1989. Mr. Near became Chairman of the Board in 1991.
Mr. Casey was Senior Vice President of the Company from 1984 to 1987, at which
time he became Executive Vice President. Mr. Casey became Executive Vice
President -- Finance and Administration in 1987. He assumed his current position
in 1991.
Mr. Teter was President of Casa Lupita Restaurants and Executive Vice President
of its parent company, Ponderosa, Inc., from 1985 to 1987. Mr. Teter became a
Senior Vice President of the Company in 1987 and Executive Vice President in
1988. He assumed his present duties in 1991.
Mr. Musick was Senior Vice President, Secretary and Treasurer of Sisters
International, Inc. (a wholly-owned subsidiary of the Company) from 1982 to
1987. Mr. Musick became a Senior Vice President of the Company in 1986. He
assumed his current position in 1991.
Mr. Condos joined the Company in 1977. In 1987, he was promoted from Vice
President -- Company Operations to Senior Vice President -- Company Operations.
In 1988, he was promoted to Senior Vice President of Wendy's Southwest Region.
In 1992, he was named Executive Vice President -- Development.
Mr. Meyer joined the Company in 1992 and was promoted to Senior Vice President
in 1993. Prior to Wendy's, Mr. Meyer was Zone Vice President for Chemlawn
Services, Inc. from 1989 to 1992. Mr. Meyer previously had 15 years of
experience in the food industry including positions with Big Cheese, Pizza Hut,
Inc., Red Lobster, and KFC.
Mr. Wright joined Wendy's in 1993 as President, International. He was with Pizza
Hut, Inc. as Division Vice President from 1989 to 1993 and also with Pizza Hut,
Inc. from 1981 to 1986 where he had successful international experience with
their operations in Europe. From 1986 to 1989 Mr. Wright was National Vice
President of Operations, East with Taco Bell.
Mr. Serina was Vice President -- Operations of Krystal Co. from 1986 to 1988.
From 1988 to 1990, he was President and Chief Executive Officer of Self-Service
Drive Thru, Inc. Mr. Serina joined the Company in 1990 as Vice President and was
promoted in 1990 to Senior Vice President.
Mr. Schauf joined the Company in 1987 as Vice President, General Counsel and
Secretary. In 1991, he became Senior Vice President, General Counsel and
Secretary. Prior to joining the Company, Mr. Schauf was affiliated with Pizza
Hut, Inc.
Mr. Farrar joined Wendy's in 1980 as Area Director. In 1982, he transferred from
Company Operations to Franchise Operations where he became Regional Vice
President in 1983. In 1988, he moved back to Company Operations as Division Vice
President where he held that position until being named Senior Vice President to
the Southwest Region in 1992.
Mr. Whiting joined the Company in 1975. In 1982, he became Regional Director for
the West Virginia Region and named Division Vice President in 1987. In 1992, he
became Senior Vice President to the Midwest Region.
Mr. Grube joined Wendy's in 1990 as Division Vice President and was promoted to
Senior Vice President -- Canada in 1993. Before joining Wendy's, he was with
Imperial Savings Association from 1988 to 1990. Prior to that time, Mr. Grube
spent 12 years with Pizza Hut, Inc.
8
PART II
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Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
Wendy's shares are traded on the New York, Boston, Cincinnati, Midwest, Pacific,
and Philadelphia Stock Exchanges (trading symbol: WEN). Options in Wendy's
shares are traded on the Pacific Stock Exchange.
Market Price of Common Stock
1993 High Low Close
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First Quarter $14 1/4 $12 3/8 $13 1/2
Second Quarter 15 1/8 12 7/8 14 1/2
Third Quarter 15 1/2 13 3/8 15 1/2
Fourth Quarter 17 3/8 15 1/8 17 3/8
1992 High Low Close
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First Quarter $13 3/8 $ 9 1/4 $12 3/8
Second Quarter 12 7/8 10 11 1/4
Third Quarter 12 3/4 10 7/8 12 1/2
Fourth Quarter 14 1/4 11 1/2 12 5/8
At March 7, 1994, the Company had approximately 56,000 shareholders of record.
Dividends Declared Per Share
Quarter 1993 1992
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First $.06 $.06
Second .06 .06
Third .06 .06
Fourth .06 .06
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Item 6. Selected Financial Data
1993 1992* 1991 1990 1989
Operations (In millions)
Systemwide sales $3,924.1 3,612.9 3,223.6 3,070.3 3,036.1
Retail sales $1,198.8 1,123.9 962.8 922.2 973.1
Revenues $1,320.1 1,238.5 1,059.7 1,010.9 1,069.7
Company restaurant
operating profit $ 173.7 154.6 125.2 115.5 89.2
Income before income taxes $ 115.5 101.1 77.7 60.7 36.9
Net income** $ 79.3 64.7 51.3 39.3 30.4
Capital expenditures $ 116.6 119.6 69.4 41.7 38.9
Financial Position (In millions)
Total assets $ 996.5 919.5 880.3 757.9 779.6
Property and equipment, net $ 707.3 675.5 617.1 569.6 579.6
Long-term obligations $ 200.6 233.7 239.6 168.1 178.9
Shareholders' equity $ 600.8 528.7 477.9 446.8 428.9
Per Share Data
Net income -- fully diluted** $ .76 .63 .52 .41 .32
Dividends $ .24 .24 .24 .24 .24
Shareholders' equity $ 5.96 5.35 4.91 4.61 4.44
Market price at year-end $ 17.38 12.63 9.25 6.38 4.63
* Fiscal year 1992 includes 53 weeks.
** 1990 and 1989 reflect a $696,000, $.01 per share; and $1.6 million, $.02 per
share extraordinary gain on early extinguishment of debt, respectively; net
income in 1989 includes the cumulative effect of change in accounting for
income taxes of $5.2 million, $.05 per share.
9
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
1993 Overview
Wendy's achieved record net income of $79.3 million in 1993, an increase
of 23% over 1992 and 55% over 1991. Fully diluted earnings per share was $.76
in 1993 versus $.63 in 1992. The Wendy's system, both company and franchise
restaurants, also enjoyed its highest ever systemwide sales and average net
sales per restaurant. The sales increases reflect the continuing emphasis on
restaurant operations, strong customer response to our advertising campaigns,
the popularity of the value strategy which incorporates both price and
quality, and the introduction of new products.
The company's operating margin improved to 14.5% versus 13.8% in 1992. The
margin has improved each year since 1989. The improvement reflects both control
of restaurant operating costs and expanding average sales per restaurant.
New system restaurant openings totaled 251 in 1993 with another 63 under
construction at year-end, the most ambitious new restaurant development since
1986. These new company and franchised restaurants achieved average net sales
approximately 15% higher than the remaining restaurants. The new company-
operated restaurants also exhibited higher average operating profit per
restaurant than the remaining company-operated restaurants.
During 1993, Wendy's made several modifications to benefit future
profitability, increase efficiency, and strengthen its financial position.
Selected underperforming company-operated restaurants were identified for
closure. Various restaurant facilities were remodeled and upgraded to keep
abreast of customer requirements and demands for operating efficiency.
Canadian operations were reorganized on an administrative level and
geographically to align themselves with domestic operating regions. The
domestic regional operating structure was also fine-tuned both by transferring
responsibilities between regions and by franchising company-operated markets.
Adjustments were made to reserve and expense accruals to reflect the favorable
resolution of selected franchise problems, trends in workers' compensation and
general liability claims, and tax benefits as a result of the Canadian
reorganization. Additionally, the company retired $30 million of debt early,
resulting in a year-end debt to equity ratio of 33%.
Retail Sales
Total company retail sales increased 6.7% in 1993 to $1,198.8 million
compared with $1,123.9 million in 1992. This increase reflects a 5.8% increase
in average domestic net restaurant sales and an additional 32 average domestic
restaurants open. Total retail sales for 1993 reflect one week's fewer sales
as 1992 was a 53-week reporting period.
The improvement in average domestic net sales is a result of the
company's solid restaurant operations, highly effective marketing campaigns of
both existing and new products, and the value menu strategy, such as Super
Value Menu, Combo Meals, and Kids' Meals. These initiatives increased average
transactions by approximately 4.2% in 1993.
Domestic selling prices for the company were down approximately .4% in
1993 following a 1.9% decrease in 1992. Selling prices for 1993 were actually
lower than in 1990 as the company continued to emphasize its value strategy.
The following chart reflects average net sales per domestic restaurant
for the last three years:
1993 1992 1991
Company $978,000 $924,000 $874,000
Franchise $960,000 $907,000 $843,000
Total domestic $966,000 $912,000 $852,000
The 1992 amounts have been adjusted to a comparable 52-week year basis.
Using this method, 1993 average net sales per domestic company restaurant
increased 5.8% over 1992 and 11.9% over 1991.
Restaurant Operating Costs and Expenses
Total company cost of sales as a percent of retail sales decreased
slightly to 58.9% in 1993 from 59% in 1992. Domestic food costs as a percent
of domestic retail sales increased to 30.2% in 1993 from 29.7% in 1992. This
reflects increases primarily in beef, chicken, and lettuce prices coinciding
with reductions in selling prices.
Domestic labor costs as a percent of domestic retail sales were 24.5% in
1993 compared with 24.9% in 1992. This improvement reflects efforts to adhere
to the company's labor guidelines along with the impact from higher domestic
average restaurant sales offset by restaurant labor wage rate increases of
approximately 2% in 1993. In both years, new restaurant openings incurred
extra labor during the initial operating periods.
Total company restaurant operating costs were $319.4 or 26.6% of retail
sales for 1993. This compares to costs in 1992 of $306.4 million or 27.2% of
retail sales. A significant portion of this percentage improvement resulted
from the relatively fixed nature of some of the cost components, while average
sales levels increased. In addition, group insurance and coupon expense
declined as a percent of sales.
Royalties
Royalty income, before reserves, was $106.3 million for the year ended
January 2, 1994, and $97.6 million for the year ended January 3, 1993, or a 9%
increase. Royalty reserves amounted to
10
$1.7 million in 1993 compared with $1.2 million in 1992. Average net sales per
domestic franchise restaurant increased to $960,000 in 1993 from $907,000 in
1992, an increase of 5.9% on a comparable 52-week year basis. The remainder of
the increase reflects royalties from additional domestic and international
franchise restaurants.
Management reviews reserve amounts on a monthly basis and believes the
company has adequate levels for royalty and other franchise-related
receivables and contingencies.
OTHER REVENUES
Pretax gains on restaurant dispositions for 1993 amounted to $8.1 million
compared with $7.7 million in 1992. There were 86 company restaurants sold to
franchisees in 1993 versus 44 restaurants in 1992. Certain dispositions have
resulted in land and buildings being retained by the company and leased to
franchisees. This has provided a source of rental income to the company which
increased $1.8 million over 1992 to $10.1 million.
A reserve of $2.8 million was provided in the fourth quarter of 1993 for 12
underperforming restaurants which were closed by the end of January 1994. This
was to reflect lease buy outs, the write down of assets to realizable value, and
other related expenses. Also, $30 million of debt was retired early resulting in
$672,000 of redemption expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were approximately the same percent of
revenues in both 1993 and 1992. In recognition of continuing improvement in the
financial strength of the franchise community, net reserve reversals reduced
expenses in both years. The 1993 total reversal was $2.2 million and the 1992
reversal was $1.7 million. Insurance accruals were increased $4.0 million in the
fourth quarter of 1993 to reflect trends in workers' compensation and general
liability claims. The largest component of general and administrative expense is
salaries and related benefits which rose $7.9 million, primarily reflecting
annual employee merit increases and minimal administrative staff additions to
support new restaurant development.
INTEREST
Net interest expense decreased in 1993 primarily reflecting lower interest
expense. Interest income was $9.8 million in 1993 versus $10.1 million in 1992.
Interest expense was $21.6 million in 1993 compared with $22.5 million in 1992.
This primarily reflects a 52-week fiscal year in 1993 versus a 53-week fiscal
year in 1992, and a reduction of expense on capitalized leases.
INCOME TAXES
The effective income tax rate for 1993 decreased to 31.4% from 36% in
1992. In the fourth quarter of 1993, the company regionalized its Canadian
operations. This was intended to produce overall administrative and
operational efficiencies and closely align the organization to domestic
operations. In connection with this restructuring the company was able to
generate significant Canadian tax benefits of $6.0 million.
COMPARISON OF 1992 TO 1991
Net income for the year ended January 3, 1993, was $64.7 million versus
$51.3 million for the year ended December 29, 1991. Net income per share, on a
fully diluted basis, was $.63 for 1992 and $.52 for 1991.
Total company retail sales were $1,123.9 million in 1992 compared with
$962.8 million in 1991, a 16.7% increase. This improvement was attributable to
an approximate increase of 5.7% in average domestic net sales, an average of
97 more company-operated restaurants open, and a 53-week reporting period in
1992 compared with a 52-week reporting period in 1991.
The improvement in average domestic sales resulted from the continued
strengthening of restaurant operations and highly effective marketing campaigns.
Domestic selling prices for the company were down 1.9% in 1992 compared with a
.4% increase in 1991. Domestic coupon sales were essentially unchanged in 1992
at 1% of domestic retail sales versus 1.1% of domestic retail sales in 1991.
The company experienced an increase in cost of sales to 59% of retail sales
for 1992 compared with 58.5% for 1991. Domestic food costs as a percent of
domestic retail sales remained unchanged at 29.7% for 1992 and 1991. While
beef prices declined in 1992, offsetting increases were experienced in most
other product costs. Additionally, selling price reductions increased food
costs as a percent of retail sales. Domestic labor costs as a percent of
domestic retail sales were 24.9% in 1992 compared with 24.8% in 1991.
Total company restaurant operating costs were $306.4 million in 1992 versus
$274.3 million in 1991, or 27.2% and 28.5% of retail sales in 1992 and 1991,
respectively. A significant portion of this improvement resulted from the
relatively fixed nature of some of the cost components, while retail sales
levels increased.
Royalty income, before reserves, was $97.6 million for the year ended
January 3, 1993, and $88.2 million for the year ended December 29, 1991, or a
10.7% increase. Royalty reserves amounted to $1.2 million in 1992 compared
with $2.7 million in 1991. Average net sales per domestic franchise restaurant
increased to $907,000 in 1992 from $843,000 in 1991, an increase of 7.6% on a
comparable 52-week year basis. International royalty income increased in 1992
over 1991, primarily as a result of additional international franchise
restaurants.
Pretax gains on restaurant dispositions for 1992 amounted to $7.7 million
compared with $2.0 million in 1991. There were 44 company restaurants sold to
franchisees in 1992 versus 30 restaurants in 1991. Increases were also seen in
rental income amounting to $1.6 million, and technical assistance fees of $.7
million. Losses due to asset write-offs and retirements were higher in 1992 at
$4.4 million compared with $3.4 million in 1991.
11
General and administrative expenses increased to $94.1 million for 1992
versus $76.1 million in 1991. Much of the increase was a result of planned
spending for research and development, new product testing, information
services, and other support for new restaurant development. Increases were
primarily seen in the areas of salaries and wages, and employee benefits
amounting to $6.9 million. Net reserve reversals amounted to $1.7 million for
the year ended January 3, 1993, while for the previous year ended December 29,
1991, net reversals were $5.5 million. Disregarding reserve adjustments in
both years, general and administrative expenses were unchanged as a percent of
revenues.
Total interest expense was $22.5 million for 1992 compared with $23.3
million in 1991, a 3.3% decrease. Interest income declined 7.9% to $10.1
million in 1992 versus $11.0 million in 1991. This was primarily a result of
lower interest rates on investments and lower levels of short-term investments
as capital spending increased.
The effective income tax rate for 1992 increased to 36% from 34% in 1991.
The increase resulted primarily from a decrease in tax-exempt interest income,
foreign operations, and the utilization in 1991 of acquired federal tax
benefit carryforwards.
FINANCIAL POSITION
OVERVIEW
The company continued to strengthen its balance sheet in 1993.
Shareholders' equity increased $72.1 million to a total of $600.8 million at
year-end 1993. The company's return on average equity was 14.2% in 1993
compared with 12.9% in 1992. This is the seventh consecutive year return on
equity has increased. Shareholders' equity per share rose 11.4% to $5.96 at
January 2, 1994. Long-term obligations were reduced $33.0 million including
the early retirement of $30 million of 71/4% convertible subordinated
debentures. Consequently, the debt to equity ratio dropped to 33% from 44% at
year-end 1992 and 50% at year-end 1991.
Total assets increased $76.9 million or 8.4% over 1992 due to additions
to property and equipment for restaurant development and deferred income tax
assets required under the provisions of Financial Accounting Standard Number
109 --"Accounting for Income Taxes". Long-term notes receivable increased $8.6
million in 1993 reflecting notes taken for restaurant dispositions to
franchisees. At January 2, 1994, cash and short-term investments amounted to
$112.3 million. The company's return on average assets was 14.3% in 1993
compared with 13.9% in 1992, the fourth consecutive year this ratio increased.
The following chart shows year-end reserve balances related to royalty
receivables and other franchise-related receivables and contingencies by balance
sheet category:
JANUARY 2, JANUARY 3,
(In millions) 1994 1993
Accounts receivable, net $5.2 $ 6.1
Notes receivable, net .4 1.1
Other assets 1.9 2.8
Accrued expenses, other .8 .4
---- -----
$8.3 $10.4
---- -----
CASH FLOW
Cash provided by operating activities was $146.7 million in 1993, $120.5
million in 1992 and $112.7 million in 1991. Cash provided by operations
exceeded capital expenditures by $30.1 million in 1993.
Cash proceeds of $17.2 million were realized from company restaurant
dispositions in 1993, while $12.9 million was provided in 1992 and $7.8 million
in 1991. In addition to this, $98.5 million of cash was provided by the issuance
of the 7% convertible subordinated debentures in 1991.
Cash provided by operating activities over the last three years was
primarily used for capital expenditures, dividend payments, debt repayments,
and acquisitions of franchised restaurants. During the last three years, the
company has acquired 152 restaurants, and has retired early over $31 million
of higher rate debt and $33 million in convertible subordinated debentures.
During 1993, capital expenditures amounted to $117 million. New restaurant
expenditures amounted to $78 million; $27 million was spent for improvements to
existing restaurants; and $12 million was spent for other additions. Current
plans are to open or have under construction about 350 new Wendy's restaurants
in 1994, of which approximately 125 will be company-operated. Capital
expenditures could total as much as $170 million in 1994. Cash provided by
operating activities, cash and investments on hand, and possible asset
dispositions should enable the company to meet its financial requirements
through 1994.
INFLATION
Financial statements determined on a historical cost basis may not
accurately reflect all the effects of changing prices on an enterprise.
Several factors tend to reduce the impact of inflation for the company.
Inventories approximate current market prices, there is some ability to adjust
prices, and liabilities are repaid with dollars of reduced purchasing power.
INTERNATIONAL
During 1993, there were 41 international restaurant openings. On January 2,
1994, there were 377 Wendy's restaurants operating outside the United States in
30 countries and territories. Of these,
12
164 were in Canada, with 92 being operated by the company. Wendy's is
significantly underpenetrated in international markets. Therefore, the long-term
potential is great and Wendy's intends to increase international restaurant
expansion over the next several years. Although, international growth will come
primarily through franchising, joint venture agreements currently exist in Guam,
the United Kingdom, Korea, and New Zealand.
Canada is our largest international market and competition in the Canadian
restaurant industry is extremely intense. The difficult economy, tax laws, and
minimum wage increases continue to negatively impact results. Nevertheless, 1993
was a year of progress and change. Average sales of company-operated restaurants
increased 7.8% in local currency, and restaurant level profitability improved. A
promising new expansion vehicle was introduced, combining a Wendy's and Tim
Horton's, a large Canadian food service operation. Both Wendy's and Tim Horton's
share the same high quality image and products sold are complementary. Wendy's
hopes to expand this concept in the future. In the fourth quarter of 1993, the
company regionalized operations in an effort to produce overall administrative
and operational efficiencies and closely align the organization with domestic
operations.
MANAGEMENT'S OUTLOOK
The quick-service restaurant industry is extremely competitive and should
remain so in the foreseeable future. Wendy's management believes that the
strategies adhered to in the past few years remain important to future
performance.
Responsible system growth will continue in 1994, focusing on the markets
with the best potential for sales and return on investment. Each proposed site
must undergo an extensive operational and financial review before it is
approved. The company plans on opening or having under construction 125 new
company-owned restaurants and 225 new franchised restaurants in 1994. The
company's expansion will be accomplished by use of the cash and investments on
hand, cash provided by 1994 operations, and possible asset dispositions.
Wendy's will also continue efforts to increase sales and profitability in
existing restaurants. Continued emphasis on improving operations, new
promotional and permanent menu items, local and national marketing to increase
customer awareness, and restaurant remodels are all aimed at increasing customer
transactions. Selling prices decreased .4% in 1993, and any potential change in
1994 should be very modest. The company will continue to focus on restaurant
cost control by use of company guidelines for food, labor, and other expenses.
In cooperation with our vendors, Wendy's closely monitors purchase prices while
maintaining exacting quality standards for all products in each restaurant. In
keeping with quality standards the company strictly adheres to food safety and
sanitation guidelines. These guidelines provide detailed information and methods
to apply sanitation procedures to food handling functions, from the point of
purchase through the ultimate service to the customer.
Cost control of administrative overhead is also extremely important.
Budgets are developed for each corporate and field department and actual
expenses are monitored by comparison to the budget and to historical results.
Any proposed staff additions must be justified based on the contribution to
company or franchise operations support and to restaurant development.
Additionally for 1994, the company anticipates the effective income tax
rate will more closely approximate historic rates.
Wendy's will also continue its strategy of acquiring restaurants from and
selling restaurants to franchisees where prudent. Acquired restaurants, which
may be distressed, can be improved and then operated profitably by the company
or sold to a qualified franchisee. Selling restaurants generates cash which is
used for new development, acquisitions, and remodeling programs. During the
last three years, the company purchased 152 franchised restaurants and sold
160 company-operated restaurants to franchisees. Underperforming restaurants,
whether company or franchise operated, are monitored carefully and revitalized
where economically possible or closed if necessary for the financial health of
the system.
The strength and vitality of the franchise community is an essential part
of the continued success of the Wendy's system. Various strategies have been
developed to assist individual franchisees and the overall franchise system.
The aim of these strategies is to encourage responsible new restaurant
development, increase franchisees' financial health, increase royalty income,
and improve royalty receivable collection rates. The company will continue to
maintain appropriate reserves against franchise receivables.
The strategies developed have been beneficial and are appropriate for the
future success of the Wendy's system. However, competition is extremely
intense in the quick-service restaurant segment, particularly in the areas of
marketing and pricing. In addition, numerous external factors can have a
significant impact on the company's performance. Such factors could include
product costs, the economy, consumer perception of food safety, the weather,
changing consumer tastes, the labor supply, the company's ability to obtain
and finance real estate, and government initiatives such as health care
issues, minimum wage rates, taxes, and possible franchise legislation.
The adoption of Financial Accounting Standard Number 112 (SFAS 112) --
"Employers' Accounting for Postemployment Benefits" will not have a significant
impact on the results of operations or financial condition of the company.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Fifty-two weeks ended January 2, 1994, fifty-three weeks ended January 3, 1993,
and fifty-two weeks ended December 29, 1991
(In thousands except per share data) 1993 1992 1991
REVENUES
Retail sales $1,198,777 $1,123,868 $ 962,793
Royalties 104,663 96,403 85,518
Other 16,655 18,235 11,432
---------- ---------- ----------
1,320,095 1,238,506 1,059,743
---------- ---------- ----------
COSTS AND EXPENSES
Cost of sales 705,671 662,892 563,245
Company restaurant operating costs 319,367 306,356 274,312
General and administrative expenses 102,161 94,068 76,077
Depreciation and amortization of property
and equipment 65,655 61,686 56,071
Interest, net 11,706 12,414 12,303
---------- ---------- ----------
1,204,560 1,137,416 982,008
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 115,535 101,090 77,735
INCOME TAXES 36,268 36,392 26,430
---------- ---------- ----------
NET INCOME $ 79,267 $ 64,698 $ 51,305
========== ========== ==========
PRIMARY EARNINGS PER SHARE $.77 $.64 $.52
==== ==== ====
FULLY DILUTED EARNINGS PER SHARE $.76 $.63 $.52
==== ==== ====
DIVIDENDS PER SHARE $.24 $.24 $.24
==== ==== ====
PRIMARY SHARES 102,897 101,414 99,386
---------- ---------- ----------
FULLY DILUTED SHARES 111,245 109,650 99,508
---------- ---------- ----------
The accompanying notes beginning on page 18 are an integral part of the
Consolidated Financial Statements.
14
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JANUARY 2, 1994, AND JANUARY 3, 1993
(Dollars in thousands) 1993 1992
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 71,698 $ 77,412
Short-term investments, at cost which approximates
market 40,647 34,260
Accounts receivable, net 27,381 26,042
Notes receivable, net 5,259 6,244
Inventories and other 21,478 17,642
Deferred income taxes 12,244 514
---------- ----------
178,707 162,114
---------- ----------
PROPERTY AND EQUIPMENT, AT COST
Land 203,651 184,818
Buildings 329,023 307,168
Leasehold improvements 182,519 175,047
Restaurant equipment 289,242 279,314
Other equipment 65,197 60,616
Capital leases 64,148 64,157
---------- ----------
1,133,780 1,071,120
Accumulated depreciation and amortization (426,496) (395,614)
---------- ----------
707,284 675,506
---------- ----------
COST IN EXCESS OF NET ASSETS ACQUIRED, NET 24,314 26,263
OTHER ASSETS 70,931 55,657
DEFERRED INCOME TAXES 15,250
---------- ----------
$ 996,486 $ 919,540
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts and drafts payable $ 68,735 $ 60,766
Accrued expenses
Salaries and wages 16,288 14,727
Taxes 14,935 14,818
Insurance 21,345 13,487
Other 11,160 11,930
Income taxes 2,896 7,252
Deferred income taxes 2,299
Current portion of long-term obligations 5,611 5,250
---------- ----------
143,269 128,230
---------- ----------
LONG-TERM OBLIGATIONS
Term debt 156,741 187,685
Capital leases 43,892 45,986
---------- ----------
200,633 233,671
---------- ----------
DEFERRED INCOME TAXES 40,859 23,933
OTHER LONG-TERM LIABILITIES 10,930 5,051
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, authorized: 250,000 shares
Common stock, $.10 stated value, Authorized:
200,000,000 shares
Issued: 100,823,000 and 98,855,000 shares,
respectively 10,082 9,885
Capital in excess of stated value 161,238 141,558
Retained earnings 430,866 375,425
Translation adjustments 1,347 2,072
Pension liability adjustment (2,572) (119)
---------- ----------
600,961 528,821
Treasury stock at cost: 29,000 shares (166) (166)
---------- ----------
600,795 528,655
---------- ----------
$ 996,486 $ 919,540
========== ==========
The accompanying notes beginning on page 18 are an integral part of the
Consolidated Financial Statements.
15
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Fifty-two weeks ended January 2, 1994, fifty-three weeks ended January 3, 1993,
and fifty-two weeks ended December 29, 1991
(In thousands) 1993 1992 1991
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 79,267 $ 64,698 $ 51,305
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 68,978 63,374 58,226
Deferred income taxes (6,370) (28) (6,324)
Net gain from restaurant dispositions (8,140) (7,681) (1,976)
Net loss on other asset dispositions 6,466 4,424 3,422
Net reserves for accounts receivable and other
contingencies (747) (545) (2,551)
Loss on early extinguishment of debt 672 23 638
Changes in operating assets and liabilities
net of effects of acquisitions and dispositions
of restaurants
Accounts and notes receivable (386) (9,104) (1,077)
Inventories and other (4,478) (1,801) (1,068)
Accounts and drafts payable and accrued
expenses 8,580 (1,458) 16,724
(Increase) decrease in other assets (305) 2,463 (4,076)
Income taxes (4,356) 1,700 (830)
Other changes, net 7,495 4,412 323
--------- --------- --------
Net cash provided by operating activities 146,676 120,477 112,736
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from restaurant dispositions 17,155 12,943 7,848
Proceeds from other asset dispositions 9,710 2,018 5,364
Capital expenditures (116,573) (119,567) (69,369)
Acquisition of franchises (8,685) (7,602) (16,577)
Investment in marketable securities (6,387) (19,002) (15,258)
Other investing activities (2,315) (3,242) (3,735)
--------- --------- --------
Net cash used in investing activities (107,095) (134,452) (91,727)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of term debt 98,500
Proceeds from issuance of common stock 12,890 9,381 3,356
Principal payments on long-term obligations (34,463) (13,738) (34,532)
Dividends paid (23,826) (23,523) (23,278)
--------- --------- --------
Net cash provided by (used in) financing
activities (45,399) (27,880) 44,046
--------- --------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 104 (210) (83)
--------- --------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (5,714) (42,065) 64,972
--------- --------- --------
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 77,412 119,477 54,505
--------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 71,698 $ 77,412 $119,477
--------- --------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid $ 21,874 $ 22,478 $ 24,495
Interest received 8,832 10,106 9,452
Income taxes paid 41,517 32,092 32,971
Debt converted to common stock 1,510
Capital lease obligations incurred 1,541 1,736
Acquisition of franchises
Fair value of assets acquired, net $ 13,170 $ 7,818 $ 29,592
Cash paid 8,685 7,602 16,577
--------- --------- --------
Liabilities assumed $ 4,485 $ 216 $ 13,015
--------- --------- --------
The accompanying notes beginning on page 18 are an integral part of the
Consolidated Financial Statements.
16
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Fifty-two weeks ended January 2, 1994, fifty-three weeks ended January 3, 1993,
and fifty-two weeks ended December 29, 1991
(In thousands) 1993 1992 1991
COMMON STOCK AT STATED VALUE
Balance at beginning of period $ 9,885 $ 9,741 $ 9,685
Exercise of options 188 144 56
Conversion of subordinated debentures 9
-------- -------- --------
Balance at end of period 10,082 9,885 9,741
-------- -------- --------
CAPITAL IN EXCESS OF STATED VALUE
Balance at beginning of period 141,558 130,473 126,616
Exercise of options, including tax benefits 18,179 11,085 3,857
Conversion of subordinated debentures 1,501
-------- -------- --------
Balance at end of period 161,238 141,558 130,473
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period 375,425 334,250 306,223
Net income 79,267 64,698 51,305
Dividends paid (23,826) (23,523) (23,278)
-------- -------- --------
Balance at end of period 430,866 375,425 334,250
-------- -------- --------
TRANSLATION ADJUSTMENTS 1,347 2,072 4,412
-------- -------- --------
PENSION LIABILITY ADJUSTMENT (2,572) (119) (773)
-------- -------- --------
TREASURY STOCK AT COST (166) (166) (166)
-------- -------- --------
SHAREHOLDERS' EQUITY $600,795 $528,655 $477,937
-------- -------- --------
COMMON SHARES
Balance issued at beginning of period 98,855 97,410 96,850
Exercise of options 1,882 1,445 560
Conversion of subordinated debentures 86
-------- -------- --------
Balance issued at end of period 100,823 98,855 97,410
TREASURY SHARES (29) (29) (29)
-------- -------- --------
COMMON SHARES ISSUED AND OUTSTANDING 100,794 98,826 97,381
-------- -------- --------
The accompanying notes beginning on page 18 are an integral part of the
Consolidated Financial Statements.
17
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business
The company's principal business is the operation of quick-service
restaurants serving high-quality food. At year-end 1993 the company and its
franchise owners operated 4,168 of these restaurants under the name "Wendy's"
in 50 states and in 30 other countries and territories.
Fiscal year
The company's fiscal year ends on the Sunday nearest to December 31. The
1993 and 1991 fiscal years consisted of 52 weeks and the 1992 fiscal year
consisted of 53 weeks.
Basis of presentation
The Consolidated Financial Statements include the accounts of the company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
For purposes of the Consolidated Statement of Cash Flows, the company
considers short-term investments with original maturities of three months or
less as cash equivalents. A substantial portion of these investments are tax-
exempt instruments.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market, and consist primarily of restaurant food items and paper supplies.
Property and equipment
Depreciation and amortization are recognized on the straight-line method in
amounts adequate to amortize costs over the following estimated useful lives:
buildings, up to 25 years; leasehold improvements, up to 25 years; restaurant
equipment, up to 15 years; other equipment, up to ten years; and property under
capital leases, the primary lease term. Interest cost associated with the
construction of new restaurants is capitalized, while certain other costs, such
as ground rentals and real estate taxes, are expensed as incurred.
Cost in excess of net assets acquired
The cost in excess of net assets acquired is amortized on the straight-
line method over periods ranging from ten to 40 years which, for leased
restaurants, include the original lease period plus renewal options, if
applicable. Accumulated amortization of cost in excess of net assets acquired
was $13.2 million and $12.3 million at January 2, 1994, and January 3, 1993,
respectively.
Capitalized software development costs
The company capitalizes internally developed software costs which are
amortized over a seven year period.
Franchise operations
The company grants franchises to independent operators who in turn pay
technical assistance fees, royalties, and in some cases, rents for each
restaurant opened. A technical assistance fee is recorded as income when each
restaurant commences operations. Royalties, four percent of monthly net sales,
are recognized as income on the accrual basis. The company has established
reserves related to the collection of franchise royalties and other franchise-
related receivables and commitments (see Note 8). Included in other assets is
the long-term portion of notes receivable amounting to $29.7 million and $21.1
million at January 2, 1994, and January 3, 1993, respectively. The carrying
amount of notes receivable currently approximates fair value.
Franchise owners receive assistance in such areas as real estate site
selection, construction consulting, purchasing, and marketing from company
personnel who also furnish these services to company-operated restaurants.
Franchise expenses are included in general and administrative expenses.
Foreign operations
At January 2, 1994, the company and its franchise owners operated 164
restaurants in Canada. Additionally, 213 restaurants were operated by
franchise owners in other foreign countries and territories.
Net income per share
Primary earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding and dilutive common share
equivalents during each period. Fully diluted computations assume full
conversion of the subordinated debentures into common shares, when dilutive,
and the elimination of related expenses, net of income taxes.
18
2. TERM DEBT
Term debt at each year-end consisted of the following:
(In thousands) 1993 1992
Notes, unsecured, and Mortgages Payable
with a weighted average interest rate of
8.9%, due in installments through 2004 $ 5,639 $ 6,037
Industrial Development Revenue Bonds,
with a weighted average interest rate of
7.6%, due in installments through 2002 1,980 2,323
12 1/8% Notes, due April 1, 1995 49,977 49,959
7 1/4% Convertible Subordinated Debentures,
due December 1, 2010 30,072
7% Convertible Subordinated Debentures,
due April 1, 2006 100,000 100,000
-------- --------
157,596 188,391
Current portion (855) (706)
-------- --------
$156,741 $187,685
-------- --------
The industrial development revenue bonds were issued to provide funds for
the acquisition, construction, and improvement of various restaurants.
The 12 1/8% notes may not be redeemed prior to maturity.
The 7% convertible debentures are subordinated as to principal, premium,
if any, and interest to all senior indebtedness as defined in the indenture.
The conversion price is $12.30 per common share, subject to adjustment in
certain events. The debentures are redeemable, with limited exceptions, at the
option of the company on or after April 5, 1996.
The company purchased $28.6 million, $8.3 million, and $25.5 million of
debt in 1993, 1992, and 1991, respectively. These purchases resulted in losses
of $672,000, $23,000, and $638,000 in 1993, 1992, and 1991, respectively.
Based on quoted market prices for the convertible subordinated debentures
and future cash flows for all other long-term debt, the fair value of total
long-term debt was approximately $214 million at January 2, 1994, and $223
million at January 3, 1993.
The combined aggregate amounts of future maturities for all term debt are
as follows:
(In thousands)
1994 $ 855
1995 52,187
1996 548
1997 422
1998 282
Later years 103,302
--------
$157,596
--------
At January 2, 1994, the company had unused contractual lines of credit
aggregating approximately $31 million from various financial institutions,
generally at their respective prime rates.
Net interest expense for each year consisted of the following:
(In thousands) 1993 1992 1991
Total interest charges $21,554 $ 22,511 $ 23,268
Interest income (9,848) (10,097) (10,965)
------- -------- --------
$11,706 $ 12,414 $ 12,303
------- -------- --------
3. LEASES
The company occupies land and buildings and uses equipment under terms of
numerous lease agreements expiring on various dates through 2027. Terms of land
only and land and building leases are generally for 20 to 25 years. Many of
these leases provide for future rent escalations and renewal options. Certain
leases require contingent rent, determined as a percentage of sales, when annual
sales exceed specified levels. Most leases also obligate the company to pay the
costs of maintenance, insurance, and property taxes.
At each year-end capital leases consisted of the following:
(In thousands) 1993 1992
Buildings $ 64,148 $ 64,157
Accumulated amortization (29,972) (28,623)
-------- --------
$ 34,176 $ 35,534
-------- --------
19
At January 2, 1994, future minimum lease payments for all leases, and the
present value of the net minimum lease payments for capital leases, were as
follows:
Capital Operating
(In thousands) Leases Leases
1994 $ 9,828 $ 23,263
1995 9,908 22,740
1996 9,792 21,804
1997 9,369 20,789
1998 8,462 19,745
Later years 30,117 102,813
-------- --------
Total minimum lease payments 77,476 $211,154
--------
Amount representing interest (28,828)
--------
Present value of net minimum
lease payments 48,648
Current portion (4,756)
--------
$ 43,892
--------
Total minimum lease payments have not been reduced by minimum sublease
rentals of $1.9 million under capital leases, and $27.6 million under
operating leases due in the future under noncancellable subleases.
Rent expense for each year is included in company restaurant operating
costs and amounted to:
(In thousands) 1993 1992 1991
Minimum rents $28,425 $28,346 $26,703
Contingent rents 7,238 6,544 5,576
Sublease rents (3,256) (3,283) (2,859)
------- ------- -------
$32,407 $31,607 $29,420
------- ------- -------
In connection with the franchising of certain restaurants, the company has
leased land, buildings, and equipment to the related franchise owners.
Most leases provide for monthly rentals based on a percentage of sales,
while others provide for fixed payments with contingent rent when sales exceed
certain levels. Lease terms are approximately ten to 20 years with one or more
five-year renewal options. The franchise owners bear the cost of maintenance,
insurance, and property taxes.
The company generally accounts for the building and equipment portions of
the fixed payment leases as direct financing leases. The land portion of
leases and leases with rents based on a percentage of sales are accounted for
as operating leases.
At each year-end the net investment in financing leases receivable,
included in other assets, consisted of the following:
(In thousands) 1993 1992
Total minimum lease receipts $ 45,548 $ 42,152
Estimated residual value 4,662 3,927
Amount representing unearned
interest (25,806) (24,803)
Current portion, included
in accounts receivable (911) (688)
-------- --------
$ 23,493 $ 20,588
-------- --------
At each year-end assets leased under operating leases
consisted of the following:
(In thousands) 1993 1992
Land $ 52,063 $ 45,661
Building 81,060 77,858
Equipment 16,288 16,983
-------- --------
149,411 140,502
Accumulated amortization (41,090) (38,197)
-------- --------
$108,321 $102,305
-------- --------
At January 2, 1994, future minimum lease receipts were as follows:
Financing Operating
(In thousands) Leases Leases
1994 $ 3,396 $ 2,946
1995 3,411 2,982
1996 3,377 2,986
1997 3,396 2,681
1998 3,409 2,611
Later years 28,559 16,989
------- -------
$45,548 $31,195
------- -------
20
Net rental income for each year is included in other revenues and amounted
to:
(In thousands) 1993 1992 1991
Minimum rents $ 1,860 $ 1,182 $ 1,792
Contingent rents 8,255 7,180 4,994
------- ------- -------
$10,115 $ 8,362 $ 6,786
------- ------- -------
4. INCOME TAXES
The provision for income taxes for each year consisted of the following:
(In thousands) 1993 1992 1991
Current
Federal $39,512 $32,239 $27,859
State and local 3,126 4,181 4,895
------- ------- -------
42,638 36,420 32,754
Deferred
Federal (243) (24) (4,795)
State and local (127) (4) (1,529)
Foreign (6,000)
------- ------- -------
(6,370) (28) (6,324)
------- ------- -------
$36,268 $36,392 $26,430
------- ------- -------
In the first quarter of 1993, the company adopted Financial Accounting
Standard Number 109 (SFAS 109) -- "Accounting for Income Taxes". Under SFAS No.
109, like Financial Accounting Standard Number 96 (SFAS 96) -- "Accounting for
Income Taxes" which the company adopted in 1989, deferred income taxes are
recognized by employing the liability method. The company elected not to restate
prior years' financial statements under the provisions of SFAS No. 109 and has
determined that the cumulative effect of the implementation was not significant.
The temporary differences which give rise to deferred tax assets and liabilities
as of January 2, 1994, are as follows:
Deferred Tax Deferred Tax
(In thousands) Assets Liabilities
Lease transactions $ 4,410 $ 9,345
Depreciation 27,904
Reserves not currently
deductible 12,116
Foreign operations 14,040
All other 4,951 5,909
------- -------
35,517 43,158
Valuation allowance (8,023)
------- -------
$27,494 $43,158
------- -------
A deferred tax asset for foreign operations was established during the first
quarter of 1993, upon the adoption of SFAS 109, for excess capital allowances
and net operating loss carryovers which are related to a Canadian subsidiary.
This deferred tax asset was largely offset by a valuation allowance. During the
fourth quarter of 1993, when the Canadian operations were regionalized along
with a legal entity restructuring, the valuation allowance decreased by $6.0
million, predominantly due to the recognition of Canadian tax benefits.
A reconciliation of the statutory U.S. Federal income tax rate of 35% in
1993 and 34% in 1992 and 1991 to the company's effective tax rate for each year
is shown below:
(In thousands) 1993 1992 1991
Income taxes at statutory rate $40,437 $34,371 $26,430
Effect of foreign operations 720 1,305 392
State and local taxes, net of
federal benefit 1,949 2,757 2,222
Canadian restructuring benefit (6,000)
Jobs and other tax credits (456) (1,785) (1,440)
Tax-exempt interest (537) (756) (1,373)
Goodwill amortization 526 388 401
Other (371) 112 (202)
------- ------- -------
Income taxes at effective rate $36,268 $36,392 $26,430
------- ------- -------
5. Stock Option and Shareholder Rights Plans
The company has various stock option plans which provide options for certain
employees and outside directors to purchase common shares of the company. Grants
of options to employees and the periods during which such options can be
exercised are at the discretion of the Board of Directors. Grants of options to
outside directors and the periods during which such options can be exercised are
specified in the plan applicable to directors and do not involve discretionary
authority of the Board. All options expire at the end of the exercise period.
Options are granted at the fair
21
market value of the company's common shares on the date of grant and no amounts
applicable thereto are reflected in net income. The company makes no recognition
of the options in the financial statements until they are exercised.
On August 2, 1990, the Board of Directors adopted the WeShare Stock Option
Plan (WeShare Plan), a non-qualified stock option plan to provide for grants of
options equal to ten percent of each eligible employee's earnings, with a
minimum of 20 options to be made to each eligible employee annually. An
aggregate of 4.0 million common shares of the company have been reserved
pursuant to the WeShare Plan.
The options have a term of ten years from the grant date and become
exercisable in installments of 25 percent on each of the first four
anniversaries of the grant date. On August 5, 1993, July 30, 1992, and August
1, 1991, approximately 860,000 options, 950,000 options, and 1.1 million options
were granted to eligible employees at an exercise price of $14.38 per share,
$11.69 per share, and $9.87 per share, respectively.
In addition, the Board of Directors also adopted the 1990 Stock Option Plan
(1990 Plan) on August 2, 1990, and amended the 1990 Plan on August 1, 1991. An
aggregate of 8.0 million common shares of the company have been reserved for
issuance to key employees and outside directors under the 1990 Plan, as amended.
On August 5, 1993, July 30, 1992, and August 1, 1991, approximately 1.1 million
options, 1.0 million options, and 1.0 million options were granted to key
employees at an exercise price of $14.38 per share, $11.69 per share, and $9.87
per share, respectively.
Options granted under the company's various other stock option plans
generally become exercisable three years from the date of grant, at which time a
maximum of 50 percent is exercisable in the fourth year and the remainder in the
fifth through tenth years.
The following is a summary of stock option activity for the last three
years:
Shares Under Option Price
(Shares in thousands) Option Per Share
Balance at December 30, 1990 7,950 $ 2.67-$ 9.87
Granted 2,189 8.13- 10.44
Exercised (560) 3.26- 9.87
Cancelled (782)
-------
Balance at December 29, 1991 8,797 4.06- 10.44
Granted 2,038 11.69- 13.69
Exercised (1,445) 5.13- 9.87
Cancelled (498)
-------
Balance at January 3, 1993 8,892 4.06- 13.69
Granted 2,091 12.56- 16.44
Exercised (1,882) 4.13- 12.56
Cancelled (560)
-------
Balance at January 2, 1994 8,541 $ 4.06-$16.44
-------
Options exercisable to purchase common shares totaled 3.1 million, 2.7
million, and 2.1 million at January 2, 1994, January 3, 1993, and December 29,
1991, respectively. Shares reserved under the plans at each year-end were 10.5
million in 1993, 12.4 million in 1992, and 13.9 million in 1991.
The company has a Shareholder Rights Plan which provides for the
distribution of one preferred stock purchase right (Right), as a dividend for
each outstanding common share. Each Right entitles a shareholder to buy one ten-
thousandth of a share of a new series of preferred stock for $25 upon the
occurrence of certain events. Rights would be exercisable once a person or group
acquires 20 percent or more of the company's common shares, or ten days after a
tender offer for 20 percent or more of the common shares is announced. No
certificates will be issued unless the Rights Plan is activated.
Under certain circumstances, all Rights holders, except the person or
company holding 20 percent or more of the company's common shares, will be
entitled to purchase common shares at about half the price that such shares
traded for prior to the announcement of the acquisition. Alternatively, if the
company is acquired after the Rights plan is activated, the Rights will entitle
the holder to buy the acquiring company's shares at a similar discount. The
company can redeem the Rights for one cent per Right under certain
circumstances. If not redeemed, the Rights will expire on August 10, 1998.
6. ACQUISITIONS
During 1993, the company acquired 33 domestic restaurants for cash of $8.7
million and the assumption of certain liabilities.
In 1992, the company acquired 13 domestic and nine Canadian restaurants for
a total of $7.6 million.
During 1991, the company acquired 55 restaurants in northeast Florida. The
purchase price was $25.9 million and included cash of $5.5 million and the
settlement of certain receivables amounting to $20.4 million. Also during 1991,
the company acquired 24 restaurants in the Miami market for cash of
approximately $7.8 million and the settlement of certain receivables amounting
to approximately $1.0 million. The company acquired 18 other restaurants from
franchisees for $5.6 million during 1991.
22
7. DISPOSITIONS
In 1993, the company franchised 86 domestic restaurants. The company
franchised 42 domestic and two Canadian restaurants and 25 domestic and five
Canadian restaurants in 1992 and 1991, respectively. These transactions resulted
in pretax gains of approximately $8.1 million, $7.7 million, and $2.0 million in
1993, 1992, and 1991, respectively, and are included in other revenues.
Notes receivable related to dispositions were $23.0 million at January 2,
1994, and $14.0 million at January 3, 1993, and are included in notes receivable
and other assets.
8. COMMITMENTS AND CONTINGENCIES
At January 2, 1994, and January 3, 1993, the company's reserves established
for doubtful royalty receivables were $5.3 million and $6.4 million,
respectively. Reserves related to possible losses on notes receivable, real
estate, guarantees, claims, and contingencies involving franchisees totaled $3.0
million at January 2, 1994, and $4.0 million at January 3, 1993. These reserves
are included in accounts receivable, notes receivable, other assets, and other
accrued expenses.
The company has guaranteed certain leases and debt payments of franchise
owners with average annual obligations of $8.3 million over the next six years.
In the event of default by a franchise owner, the company generally retains the
right to acquire possession of the related restaurants.
The company is self-insured for most workers' compensation, general
liability, and automotive liability losses subject to per occurrence and
aggregate annual liability limitations. The company is also self-insured for
health care claims for eligible participating employees subject to certain
deductibles and limitations. The company determines its liability for claims
incurred but not reported on an actuarial basis.
The company has entered into long-term purchase agreements with some of its
suppliers. The range of prices and volume of purchases under the agreements may
vary according to the company's demand for the products and fluctuations in
market rates. Amounts purchased under these agreements through January 2, 1994,
were not material.
The company and its subsidiaries are parties to various legal actions and
complaints arising in the ordinary course of business; many of these are covered
by insurance. It is the opinion of the company that such matters will not
materially affect the company's financial condition or earnings.
9. Retirement Plans
The company's retirement program covers substantially all full-time
employees qualified as to age and service. The program includes a contributory
defined benefit pension plan and a defined contribution plan for management and
administrative employees. The defined benefit pension plan allows for employee
contributions and provides a matching benefit from the company in addition to a
basic benefit which is independent of employee contributions. The pension plan
also provides for a guaranteed return on employee account balances. The defined
contribution plan provides for an annual discretionary contribution which is
determined each year by the Board of Directors. In addition, the retirement
program includes a noncontributory defined benefit pension plan for all eligible
crew employees and shift managers of the company.
The company also has supplemental retirement plans for certain key employees
to replace benefits otherwise not available from the pension and profit sharing
plans due to the limitations imposed under the Internal Revenue Code and to
assure that projected benefit levels were not decreased by the changes to the
retirement program which were implemented January 1, 1989.
The funded status of the pension plans for each year-end consisted of the
following:
(In thousands) 1993 1992
Accumulated benefit obligation:
Vested $(26,387) $(19,027)
Nonvested $ (3,408) $ (2,485)
Projected benefit obligation $(32,731) $(23,831)
Fair value of plan assets 28,097 19,471
Unrecognized net transition asset (576) (769)
Unrecognized net loss 7,677 3,278
Unrecognized prior service costs 708 850
Minimum pension adjustment (4,873) (1,040)
-------- --------
Pension liability $ (1,698) $ (2,041)
-------- --------
In determining the present value of benefit obligations, discount rates of
7.0% and 7.75% were used in 1993 and 1992, respectively. The net effect of
changes in actuarial assumptions resulted in a $1.0 million reduction of pension
expense for 1992. The expected long-term rate of return on assets used was 8.5%
in 1993 and 1992. The assumed rate of increase in compensation levels was 8.0%
for 1993 and 1992. Plan assets as of January 2, 1994, consisted of debt and
equity instruments and cash and cash equivalents.
23
Net periodic pension cost for each year consisted of the following:
(In thousands) 1993 1992 1991
Service cost $ 3,326 $2,935 $ 3,348
Interest cost on projected
benefit obligation 2,165 1,672 1,359
Return on plan assets (1,607) (939) (1,165)
Net amortization (142) (442) 258
------- ------ -------
$ 3,742 $3,226 $ 3,800
------- ------ -------
The company provided for profit sharing and supplemental retirement benefits
of $2.3 million, $1.9 million, and $1.8 million for 1993, 1992, and 1991,
respectively.
A minimum pension liability equal to the excess of the accumulated benefit
obligation over the fair value of plan assets and liabilities already accrued is
reflected in the balance sheet by recording an intangible asset and reducing
shareholders' equity.
The company has an agreement with the Chairman of the Board which provides
for severance pay and commencement of retirement benefits if he terminates
employment for any reason. Upon termination the agreement requires the executive
to be available for consultation and prohibits him from competing against the
company for a two-year period. The agreement also provides that the company may
require him to return to active employment for up to 12 months under certain
circumstances. Retirement by the executive in 1994 would result in an expense
charge of approximately $3.9 million.
Financial Accounting Standard Number 112 (SFAS 112) -- "Employers'
Accounting for Postemployment Benefits" requires accrual basis accounting for
benefits provided by an employer to former or inactive employees after
employment but before retirement. The adoption of SFAS 112 will not have a
significant impact on the results of operations or financial condition of the
company.
10. WENDY'S NATIONAL ADVERTISING PROGRAM
The Wendy's National Advertising Program, Inc. (WNAP) is a not-for-profit
corporation which was established to collect and administer funds contributed by
the company and all domestic franchise owners. These contributions total 2% of
net sales and are used for advertising programs designed to increase sales and
enhance the reputation of the company and its franchise owners. For 1994 and
1993, the domestic system agreed to increase national advertising spending from
2% to 2.5% of net sales. During 1993, 1992, and 1991, the company contributed
$27.7 million, $20.7 million, and $17.5 million, respectively, to WNAP. These
contributions were recognized in company restaurant operating costs.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data:
Quarter First Second Third Fourth
- ----------------------------------------------------------------------------------------------------------------------
(In thousands except per share data) 1993 1992 1993 1992 1993 1992 1993 1992
Revenues $310,371 $278,540 $345,160 $336,812 $338,890 $317,282 $325,674 $305,872
Company restaurant operating profit 35,840 29,880 47,156 45,768 46,169 39,981 44,574 38,991
Net income 9,839 7,673 27,352 22,449 24,484 19,910 17,592 14,666
Primary earnings per share .10 .08 .27 .22 .24 .20 .17 .14
Fully diluted earnings per share .10 .08 .26 .22 .23 .19 .17 .14
The first, third and fourth quarters of 1992 each consisted of 13 weeks, while
the second quarter of 1992 consisted of 14 weeks.
- --------------------------------------------------------------------------------
Item 9. Disagreements on Accounting and Financial Disclosure
None.
PART III
- --------------------------------------------------------------------------------
Items 10, 11, 12, and 13. Directors and Executive Officers of the
Registrant; Executive Compensation; Security Ownership of Certain Beneficial
Owners and Management; and Certain Relationships and Related Transactions
The information required by these Items, other than the information set forth
following Item 4 under "Executive Officers of the Registrant", is omitted and
incorporated herein by reference from the Company's Definitive Proxy Statement
dated March 11, 1994. However, no information set forth in the Definitive Proxy
Statement regarding the Report of the Compensation Committee on Executive
Compensation (pages 10-15) or the performance graph (pages 15-16) shall be
deemed incorporated by reference into this Form 10-K.
24
PART IV
- --------------------------------------------------------------------------------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2) -- The response to this portion of Item 14 is submitted as a
separate section of this report -- See Index to Consolidated Financial
Statements and Schedules.
(3) Listing of Exhibits -- See Index to Exhibits.
The following management contracts or compensatory plans or
arrangements are required to be filed as exhibits to this report:
Sample Key Executive Agreement between the Company and Messrs. Thomas
and Near.
Sample New Key Executive Agreement between the Company and Messrs.
Brownley, Condos, Laudick, Ourant, Rath, Schauf, Teter, and Wright.
Sample New Key Executive Agreement between the Company and Messrs.
Casey and Musick.
Sample Separation and Consulting Agreement between the Company and Mr.
Near.
Consulting Agreement between the Company and Ernest S. Hayeck.
Senior Executive Earnings Maximization Plan.
Description of Earnings Maximization Plan.
Description of Management Incentive Plan.
Supplemental Executive Retirement Plan, as amended.
1978 Non-Qualified Stock Option Plan, as amended.
1982 Stock Option Plan, as amended.
1984 Stock Option Plan, as amended.
1987 Stock Option Plan, as amended.
1990 Stock Option Plan, as amended.
Wendy's WeShare Stock Option Plan, as amended.
(b) No reports on Form 8-K were filed during the quarter ended January 2,
1994.
(c) Exhibits filed with this report are attached hereto.
(d) Financial Statement Schedules -- The response to this portion of Item 14 is
submitted as a separate section of this report -- See Index to Consolidated
Financial Statements and Schedules.
25
Signatures
Pursuant to the requirements of Section 13 or 15 (d) 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.
By /s/ JOHN K. CASEY 3/22/94
-----------------------------------
John K. Casey
Vice Chairman and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ R. DAVID THOMAS* 3/22/94 /s/ JAMES W. NEAR* 3/22/94
- ------------------------------------ -----------------------------------
R. David Thomas, Senior James W. Near, Chairman of the
Chairman of the Board and Board and Chief Executive
Founder, Director Officer, Director
/s/ JOHN K. CASEY 3/22/94 /s/ GORDON F. TETER* 3/22/94
- ------------------------------------ -----------------------------------
John K. Casey, Vice Chairman Gordon F. Teter, President
and Chief Financial Officer, and Chief Operating Officer,
Director Director
/s/ RONALD E. MUSICK* 3/22/94 /s/ LAWRENCE A. LAUDICK* 3/22/94
- ------------------------------------ -----------------------------------
Ronald E. Musick, Executive Vice Lawrence A. Laudick,Vice
President, Director President, General Controller
and Assistant Secretary
/s/ W. CLAY HAMNER* 3/16/94 /s/ ERNEST S. HAYECK* 3/16/94
- ------------------------------------ -----------------------------------
W. Clay Hamner, Director Ernest S. Hayeck, Director
/s/ THOMAS F. KELLER* 3/17/94 /s/ FIELDEN B. NUTTER, SR.* 3/22/94
- ------------------------------------ -----------------------------------
Thomas F. Keller, Director Fielden B. Nutter, Sr., Director
/s/ JAMES V. PICKETT* 3/18/94 /s/ THEKLA R. SHACKELFORD* 3/16/94
- ------------------------------------ -----------------------------------
James V. Pickett, Director Thekla R. Shackelford, Director
/s/ ARTHUR I. VORYS* 3/18/94
- ------------------------------------
Arthur I. Vorys, Esq., Director
*By /s/ JOHN K. CASEY 3/22/94
-----------------------------------
John K. Casey
Attorney-in-Fact
26
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Item 14 (a) (1) and (2)
The following Consolidated Financial Statements of Wendy's International, Inc.
and Subsidiaries are included in Item 14(a).
Consolidated Statement of Income -- Years ended January 2, 1994, January 3,
1993, and December 29, 1991.
Consolidated Balance Sheet -- January 2, 1994, and January 3, 1993.
Consolidated Statement of Cash Flows -- Years ended January 2, 1994, January 3,
1993, and December 29, 1991.
Consolidated Statement of Shareholders' Equity -- Years ended January 2, 1994,
January 3, 1993, and December 29, 1991.
Notes to the Consolidated Financial Statements.
The following Consolidated Financial Statement Schedules of Wendy's
International, Inc. and Subsidiaries are included in Item 14(d):
I -- Marketable Securities -- Other Investments
V -- Property and Equipment
VI -- Accumulated Depreciation and Amortization of Property and Equipment
VII -- Guarantees of Securities of Other Issuers
VIII -- Valuation and Qualifying Accounts
X -- Consolidated Supplementary Income Statement Information
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable, or the information has been disclosed
elsewhere.
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To The Shareholders of
Wendy's International, Inc.
We have audited the consolidated financial statements and financial statement
schedules of Wendy's International, Inc. and Subsidiaries as of January 2, 1994,
and January 3, 1993 and for each of the three years in the period ended January
2, 1994 listed in Item 14(a) of this Form 10-K. These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Wendy's
International, Inc. and Subsidiaries as of January 2, 1994, and January 3, 1993,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended January 2, 1994, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
Columbus, Ohio COOPERS & LYBRAND
February 22, 1994
27
Consent of Independent Accountants
We consent to the incorporation by reference in the Registration Statements of
Wendy's International, Inc. on Form S-3 (File No. 33-39525), Post-Effective
Amendment No. 1 to Form S-4 (File No. 33-1022), and Form S-8 (File Nos. 2-67253,
2-98696, 33-18177, 2-82823, 33-36602, and 33-36603) of our report dated February
22, 1994 on our audits of the Consolidated Financial Statements and Financial
Statement Schedules of Wendy's International, Inc. and Subsidiaries as of
January 2, 1994, and January 3, 1993, and for the years ended January 2, 1994,
January 3, 1993, and December 29, 1991, which report is included in this Annual
Report on Form 10-K.
Columbus, Ohio COOPERS & LYBRAND
March 24, 1994
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WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE I -- MARKETABLE SECURITIES -- OTHER INVESTMENTS (in thousands)
January 2, 1994
Market Value of Amount at
Number of Each Issue Which Each
Name of Issuer Shares/ at Portfolio is
& Title of Principal Cost of Balance Carried in the
Each Issue Amount Each Issue Sheet Date Balance Sheet
State and Municipal
Securities $35,405 $35,405 $35,405 $35,405
Utility Preferred
Stocks 643 36,132 36,132 36,132
Euro Time Deposits $15,983 15,983 15,983 15,983
Certificates of
Deposits $ 1,000 1,000 1,000 1,000
Government
Securities Fund $10,493 10,493 10,493 10,493
------- ------- -------
$99,013 $99,013 $99,013
------- ------- -------
28
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WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE V -- PROPERTY AND EQUIPMENT (in thousands)
Balance at Other Balance at
Beginning Additions Changes Add End of
Classification of Period at Cost Retirements (Deduct) Period
For the year ended January 2, 1994:
Land............................. $ 184,818 $26,038 $ 8,964 $ 1,759 $ 203,651
Buildings........................ 307,168 36,429 19,227 4,653 329,023
Leasehold improvements........... 175,047 13,889 7,399 982 182,519
Restaurant equipment............. 279,314 33,971 25,709 1,666 289,242
Other equipment.................. 60,616 7,118 2,020 (517) 65,197
Capital leases................... 64,157 3,863 3,854 64,148
---------- -------- ------- ------- ----------
$1,071,120 $117,445(A) $67,182 $12,397(B) $1,133,780
---------- -------- ------- ------- ----------
For the year ended January 3, 1993:
Land............................. $ 158,289 $26,931 $ 2,465 $ 2,063 $ 184,818
Buildings........................ 275,907 35,319 7,440 3,382 307,168
Leasehold improvements........... 165,456 13,452 3,469 (392) 175,047
Restaurant equipment............. 253,083 36,897 11,358 692 279,314
Other equipment.................. 52,510 10,151 1,813 (232) 60,616
Capital leases................... 64,866 1,541 2,986 736 64,157
---------- -------- ------- ------- ----------
$ 970,111 $124,291(A) $29,531 $ 6,249(C) $1,071,120
---------- -------- ------- ------- ----------
For the year ended December 29, 1991:
Land............................. $ 138,465 $14,498 $ 3,216 $ 8,542 $ 158,289
Buildings........................ 252,555 21,174 5,461 7,639 275,907
Leasehold improvements........... 153,054 9,354 4,526 7,574 165,456
Restaurant equipment............. 234,928 20,989 14,728 11,894 253,083
Other equipment.................. 50,297 4,282 1,719 (350) 52,510
Capital leases................... 54,623 1,736 899 9,406 64,866
---------- -------- ------- ------- ----------
$ 883,922 $72,033(A) $30,549 $44,705(D) $ 970,111
---------- -------- ------- ------- ----------
(A) Additions are primarily due to new restaurants and capital enhancements of
existing stores.
(B) Effect of acquisitions, translation adjustments, and miscellaneous
adjustments: $11,976,000, $(2,087,000), and $2,508,000, respectively.
(C) Effect of acquisitions and translation adjustments: $10,884,000 and
$(4,635,000), respectively.
(D) Effect of acquisitions and translation adjustments: $44,712,000 and
$(7,000), respectively.
29
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WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE VI -- ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY AND
EQUIPMENT (IN THOUSANDS)
BALANCE AT ADDITIONS CHARGED OTHER BALANCE AT
BEGINNING TO COSTS & CHANGES ADD END OF
CLASSIFICATION OF PERIOD EXPENSES RETIREMENTS (DEDUCT) PERIOD
For the year ended January 2, 1994:
Buildings........................... $ 92,983 $15,433 $ 8,010 $ 1,036 $101,442
Leasehold improvements.............. 73,480 15,029 4,890 886 84,505
Restaurant equipment................ 171,371 27,210 19,524 669 179,726
Other equipment..................... 29,157 3,422 1,200 (528) 30,851
Capital leases...................... 28,623 4,561 2,685 (527) 29,972
-------- ------- ------- ------- --------
$395,614 $65,655 $36,309 $ 1,536(A) $426,496
-------- ------- ------- ------- --------
For the year ended January 3, 1993:
Buildings........................... $ 81,741 $13,931 $ 3,416 $ 727 $ 92,983
Leasehold improvements.............. 62,386 13,710 1,341 (1,275) 73,480
Restaurant equipment................ 156,200 26,069 9,817 (1,081) 171,371
Other equipment..................... 26,626 3,617 1,135 49 29,157
Capital leases...................... 26,094 4,360 1,484 (347) 28,623
-------- ------- ------- ------- --------
$353,047 $61,687 $17,193 $(1,927)(B) $395,614
-------- ------- ------- ------- --------
For the year ended December 29, 1991:
Buildings........................... $ 72,981 $12,132 $ 3,575 $ 203 $ 81,741
Leasehold improvements.............. 51,598 12,485 1,492 (205) 62,386
Restaurant equipment................ 142,168 24,194 10,213 51 156,200
Other equipment..................... 24,325 3,633 1,260 (72) 26,626
Capital leases...................... 23,233 3,627 761 (5) 26,094
-------- ------- ------- ------- --------
$314,305 $56,071 $17,301 $ (28)(B) $353,047
-------- ------- ------- ------- --------
(A) Effect of translation adjustments and miscellaneous adjustments: $(972,000)
and $2,508,000, respectively.
(B) Effect of translation adjustments.
30
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WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE VII -- GUARANTEES OF SECURITIES OF OTHER ISSUERS -- JANUARY 2, 1994
Name of Issuer Title of Issue Total Amount Nature of
of Securities of Each Class Guaranteed and Guarantee
of Securities Outstanding
See Note 3 under Item 8 on pages 19 through 21 and Note 8 on page 23 of this
Form 10-K for information concerning guarantees and lease/sublease agreements.
Of the payments guaranteed, minor amounts were in default as of January 2, 1994.
The Company has made payments pursuant to the guarantees for certain of these
franchise owners. In such cases, the Company generally retains the right to
acquire possession of the related restaurants.
31
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WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
CHARGED BALANCE
BALANCE AT (CREDITED) AT
BEGINNING TO COSTS & ADDITIONS END OF
CLASSIFICATION OF YEAR EXPENSES (DEDUCTIONS) YEAR
Fiscal year ended January
2, 1994:
Reserve for royalty
receivables $ 6,418 $ 881 $ (2,026)(a) $ 5,273
Reserve for possible
franchise-
related losses &
contingencies 4,030 (1,628) 613(a) 3,015
------- ------- -------- -------
$10,448 $ (747) $ (1,413) $ 8,288
------- ------- -------- -------
Fiscal year ended January
3, 1993:
Reserve for royalty
receivables $ 7,044 $ 250 $ (876)(a) $ 6,418
Reserve for possible
franchise-related
losses &
contingencies 5,673 (795) (848)(a) 4,030
Reserve for realignment 394 (394)(b)
------- ------- -------- -------
$13,111 $ (545) $ (2,118) $10,448
------- ------- -------- -------
Fiscal year ended December
29, 1991:
Reserve for royalty
receivables $ 9,859 $ 3,033 $ (5,848)(a) $ 7,044
Reserve for possible
franchise-related
losses &
contingencies 20,304 (5,584) (9,047)(a) 5,673
Reserve for realignment 302 92(b) 394
------- ------- -------- -------
$30,465 $(2,551) $(14,803) $13,111
------- ------- -------- -------
(a) Primarily represents reserves written off or reversed or transferred due to
the resolution of certain franchise situations.
(b) Realignment activity for the year.
Year-end balances are reflected in the Consolidated Balance Sheets as follows:
JANUARY 2 JANUARY 3 DECEMBER 29
1994 1993 1991
Deducted from accounts receivable $5,180 $ 6,125 $ 6,183
Deducted from notes receivable 452 1,099 3,044
Deducted from other assets 1,881 2,769 3,130
Included in accrued expenses -- other 775 455 754
------ ------- -------
$8,288 $10,448 $13,111
------ ------- -------
32
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WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE X -- CONSOLIDATED SUPPLEMENTARY INCOME STATEMENT INFORMATION
(In thousands)
Item Charged to Costs and Expenses
Years Ended
January 2, January 3, December 29,
1994 1993 1991
Maintenance and repairs $22,886 $21,506 $19,909
Taxes, other than payroll
and income taxes 17,711 15,776 14,435
Advertising costs 64,778 69,153 61,486
Advertising costs include the direct costs of marketing the Company's name and
products in local and national media, as well as costs such as market research,
promotional planning, couponing, and product testing.
Other supplementary income statement information is not included in this
schedule, as each of the items is less than 1% of total revenues for each of the
periods presented.
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WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit Description Page no.
------- ----------- --------
3 (a) Articles of Incorporated herein by
Incorporation, as amended reference from
to date Exhibit 3(a) of Form
10-K for the year
ended January 3, 1993.
(b) New Regulations, as Incorporated herein by
amended reference from
Exhibit 3(b) of Form
10-K for the year
ended January 3, 1993.
*4(a) Indenture between the Incorporated herein by
Company and reference from
The Huntington National Form S-3 Registration
Bank pertaining Statement, File No.
to 7% convertible 33-39525.
subordinated debentures
due 2006
(b) Preferred Stock Purchase Incorporated herein by
Rights Agreement reference from
between the Company and Form 8-A Registration
Morgan Statement, File
Shareholder Services No. 1-8116.
Trust Company
10(a) Sample Key Executive Incorporated herein by
Agreement between reference from
the Company and Messrs. Exhibit 10(a) of Form
Thomas and 10-K for the year
Near. The Employment Term ended January 3, 1993.
is ten years
for Mr. Thomas and five
years for Mr. Near
(b) Sample New Key Executive Incorporated herein by
Agreement reference from
between the Company and Exhibit 10(b) of Form
Messrs. 10-K for the year
Brownley, Condos, ended January 3, 1993.
Laudick, Ourant,
Rath, Schauf, Teter, and
Wright
(c) Sample New Key Executive Incorporated herein by
Agreement reference from
between the Company and Exhibit 10(c) of Form
Messrs. Casey 10-K for the year
and Musick ended January 3, 1993.
10(d) Sample Separation and Incorporated herein by
Consulting reference from
Agreement between the Exhibit 10(d) of Form
Company and 10-K for the year
Mr. Near ended January 3, 1993.
* Neither the Company nor its subsidiaries are party to any other instrument
with respect to long-term debt for which securities authorized thereunder
exceed 10 percent of the total assets of the Company and its subsidiaries on
a consolidated basis. Copies of instruments with respect to long-term debt of
lesser amounts will be furnished to the Commission upon request.
33
(e) Consulting agreement Incorporated herein by
between the Company reference from
and Ernest S. Exhibit 10(e) of Form
Hayeck 10-K for the year
ended January 3, 1993.
(f) Senior Executive Earnings Incorporated herein by
Maximization Plan reference from the
Company's Definitive
Proxy Statement,
dated March 11, 1994.
(g) Description of Earnings Incorporated herein by
Maximization Plan reference from
Exhibit 10(f) of Form
10-K for the year
ended January 3, 1993.
(h) Description of Incorporated herein by
Management Incentive Plan reference from
Exhibit 10(g) of Form
10-K for the year
ended January 3, 1993.
(i) Supplemental Executive Incorporated herein by
Retirement Plan, reference from
as amended Exhibit 10(h) of Form
10-K for the year
ended January 3, 1993.
(j) 1978 Non-Qualified Stock Incorporated herein by
Option Plan, as amended reference from
the Company's
Definitive Proxy
Statement, dated March
11, 1994.
(k) 1982 Stock Option Plan, Incorporated herein by
as amended reference from
the Company's
Definitive Proxy
Statement, dated March
11, 1994.
(l) 1984 Stock Option Plan, Incorporated herein by
as amended reference from
the Company's
Definitive Proxy
Statement, dated March
11, 1994.
(m) 1987 Stock Option Plan, Incorporated herein by
as amended reference from
the Company's
Definitive Proxy
Statement, dated March
11, 1994.
(n) 1990 Stock Option Plan, Incorporated herein by
as amended reference from
the Company's
Definitive Proxy
Statement, dated March
11, 1994.
(o) Wendy's WeShare Stock 35-38
Option Plan,
as amended
11 Computation of Net 39-40
Income Per Share
22 Subsidiaries of the 41
Registrant
25 Powers of Attorney 42-53
34