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1
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 December 31, 1995
( ) 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
WENDY'S INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Ohio 31-0785108
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 256, 4288 West Dublin-Granville Road, Dublin, Ohio 43017-0256
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 614-764-3100
Securities registered pursuant to Section 12(b) of the Act:
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,
(120,425,000 shares outstanding Pacific, and Philadelphia
at March 4, 1996) 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
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.
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 4, 1996 was $1,749,922,560.
Documents incorporated by reference:
Portions of the Definitive Proxy Statement dated March 6, 1996 are
incorporated by reference into Part III.
Exhibit index on pages 33-35.
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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 December 31,
1995, there were 4,667 Wendy's restaurants (Wendy's) in
operation in the United States and in 33 other countries
and territories. Of these restaurants, 1,311 were operated
by the Company and 3,356 by the Company's franchisees.
On December 29, 1995, the Company completed its acquisition
of the Tim Hortons (Hortons) restaurant chain. The
acquisition was accounted for as a pooling of interests and
is discussed in Management's Discussion and Analysis of
Financial Condition and Results of Operations (Item 7,
pages 10 through 14 of this Form 10-K). The acquisition is
also reflected in the financial statements and notes
thereto (Item 8, pages 15 through 26 of this Form 10-K). At
December 31, 1995, the Company and its franchisees operated
1,197 Hortons restaurants in Canada and the United States.
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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.
Each Hortons unit offers coffee, fresh baked goods such as
donuts, muffins, croissants, cookies, and in some units
sandwiches and soups.
The Company strives to maintain quality and uniformity
throughout all 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 Wendy's 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.
Under the Hortons franchise arrangements the franchisee is
required to purchase certain products such as coffee,
sugar, flour, and shortening from a Hortons subsidiary.
These products are distributed from six warehouses located
across Canada. Products are delivered to Hortons
restaurants primarily by Hortons fleet of trucks and
trailers.
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 December 31, 1995, the Bakery
supplied 713 restaurants operated by the Company and 1,243
restaurants operated by franchisees. At the present time,
the Bakery does not manufacture or sell any other products.
See Note 11 under Item 8 on page 26 of this Form 10-K for
information regarding revenues, income before income taxes
and identifiable assets attributable to the Company's
geographic areas.
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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.
2
3
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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, through its
acquisition of Hortons, has acquired the rights of certain
trademarks and service marks registered in the United
States Patent and Trademark office and the Canadian
Trademark office, some of which include "Tim Hortons,"
"TimBits," and "Your Friend Along the Way." 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 1995 to
2009, 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.
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WORKING CAPITAL PRACTICES
Cash from operations, cash and short-term investments on
hand, and possible asset dispositions 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.
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COMPETITION
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 at its Wendy's
restaurants 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. Hortons is known for the freshness of its wide
variety of baked goods and for its excellent coffee.
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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 Company's systems. 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 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.
3
4
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 Wendy's 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 Wendy's restaurants in the
future where prudent.
See Notes 6 and 7 under Item 8 on page 24 of this Form 10-K
for further information regarding acquisitions and
dispositions.
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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 7
of this Form 10-K, the Company has granted development
rights for Bahrain, Egypt, Morocco, Qatar, Tunisia, and the
Yemen Arab Republic.
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FRANCHISED WENDY'S RESTAURANTS
As of December 31, 1995, the Company's franchisees operated
3,356 Wendy's restaurants in 50 states, the District of
Columbia, and 33 other countries and territories.
The rights and franchises under which most franchised
restaurants in the United States are operated are set forth
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. Since January
1995 the Company has used a revised form of agreement, the
Wendy's Unit Franchise Agreement, for new franchised
restaurants operated in the United States.
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 or part of a special program, 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 some of the cost of initial orientation, the
processing of the application and background investigation.
Both the Restaurant Franchise Agreement and the Wendy's
Unit Franchise Agreement require that the franchisee pay a
royalty of 4% of gross receipts from the operation of the
restaurant. Both Agreements also typically require that the
franchisee pay the Company a technical assistance fee. In
the United States, the technical assistance fee required
under newly executed Wendy's Unit Franchise Agreements is
currently $25,000 for each restaurant.
The technical assistance fee is used to defray some of the
cost to the Company in providing technical assistance in
the development of the Wendy's restaurant, initial training
of franchisees or their operator, and in providing other
assistance associated with the opening of the Wendy's
restaurant. In certain limited instances (like the
regranting of franchise rights or the relocation of an
existing restaurant) Wendy's may charge a reduced technical
assistance fee or may waive the technical assistance fee.
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 net continuing
fee based on the gross sales of the restaurant, usually 4%.
4
5
See Schedule II on page 32 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
14 and Note 8 under Item 8 on page 24 of this Form 10-K for
further information regarding reserves, commitments, and
contingencies involving franchisees.
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FRANCHISED HORTONS UNITS
Hortons franchisees operate under several types of license
agreements. The standard term of a license agreement is ten
years plus one renewal period of ten years less one day.
The renewal is at the option of the franchisee.
For franchisees who lease land, building and/or equipment
from Hortons, the license agreement generally requires
between 3% and 6% of gross weekly sales for royalties plus
a base monthly rental payment and an incremental variable
rental payment based on gross monthly sales. For
franchisees who do not lease land, building and/or
equipment from Hortons, the license agreement generally
requires 4.5% to 7.5% of gross weekly sales for royalties.
Hortons generally retains the right to re-acquire a
franchisee's interest in a restaurant in the event the
franchisee wants to sell its interest during the first five
years of the term of the license agreement. After such
period, Hortons generally retains a right of first refusal
with regard to any proposed transfer of the franchisee's
interest in the restaurant, together with the right to
consent to a transfer to a new franchisee.
Franchisees are also required to contribute 4% of gross
monthly sales to the Hortons advertising fund, known as the
Ad Fund.
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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. Both the Restaurant
Franchise Agreement and the Wendy's Unit Franchise
Agreement provide that franchisees will spend 4% of their
gross receipts for advertising and promotions. 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). Under the Restaurant Franchise Agreement the
Company has the ability to increase the required local and
regional expenditures to 3%, for a total of 5% for
advertising and promotions, subject to certain conditions.
The Company has the ability under the Wendy's Unit
Franchise Agreement to specify and to change the 4%
advertising and promotions allocation subject to certain
restrictions. Currently, the Company requires franchisees
under the Wendy's Unit Franchise Agreement to allocate 2%
to local and regional advertising and promotions and 2% to
national advertising and promotions. In addition, under
that Agreement the Company may increase the total
advertising and promotions contribution to 5% for
franchisees operating restaurants pursuant to that
Agreement, if such increase is approved by an affirmative
vote representing 75% or more of all domestic Wendy's
restaurants.
In 1995, 1994, 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
21/2% goes toward national advertising and 11/2% toward
local and regional advertising during 1996, 1995, and 1994.
These minimum requirements will revert back to 2% for
national and 2% for local and regional advertising unless a
new systemwide vote in 1996 approves reallocation for 1997.
During 1995, 1994, and 1993, approximately $105 million,
$101 million, and $86 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.
Products sold by Hortons restaurants are advertised through
television, radio, newspapers and a variety of promotional
campaigns. Hortons provides franchisees with suggested
advertising and promotional materials. Hortons currently
collects 4% of monthly gross sales from franchisees as a
contribution to the Ad Fund. During 1995, 1994 and 1993,
approximately $21 million, $17 million and $15 million,
respectively, was spent by the Ad Fund.
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PERSONNEL
As of December 31, 1995, the Company employed approximately
47,000 people, of whom approximately 46,000 were employed
in company-operated restaurants. The total number of
full-time employees at that date was approximately 8,000.
The Company believes that its employee relations are
satisfactory.
5
6
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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 preparation area, a dining room capacity for
90 persons, and a double pick-up window for drive-through
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
Wal-Mart stores, travel centers, gas station/convenience
stores, military bases, arenas, malls, hospitals, airports,
and college campuses.
The standard Hortons restaurant currently being built
consists of a free-standing producing unit totaling 3,000
square feet. Each of these includes a bakery capable of
supplying fresh baked goods every 12 hours to several
satellite Hortons within a defined area. In addition,
Hortons has a prefabricated, 500 square foot,
drive-through-only unit. Hortons also has kiosks,
full-service carts, and mobile carts which are typically
located in high traffic areas.
There are also Wendy's and Hortons concepts combined in one
free-standing unit which averages about 5,000 square feet.
They share a common dining room seating 104, but each has
its own food preparation and storage areas and most have a
pick-up window for each restaurant.
At December 31, 1995, the Company and its franchisees
operated 4,667 Wendy's restaurants in the locations listed
under Item 2 on page 7 of this Form 10-K. Of the 1,311
company-operated Wendy's restaurants, the Company owned the
land and building for 625 restaurants, owned the building
and held long-term land leases for 266 restaurants, and
held leases covering land and building for 420 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. At December 31, 1995, there were 1,197
Hortons units, of which all but 38 were franchise operated.
Of the 1,159 franchised units, 192 were owned by Hortons
and leased to franchisees, 623 were leased by Hortons and
in turn sub-leased to a franchisee, with the remainder
either owned or leased directly by the franchise owner.
The Company also owned land and buildings or subleased for
404 Wendy's restaurant locations and 815 Hortons locations
which were in turn leased to 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.
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DOMESTIC WENDY'S
STATE COMPANY FRANCHISE
Alabama - 84
Alaska - 8
Arizona 50 15
Arkansas - 41
California 14 177
Colorado 38 55
Connecticut - 20
Delaware 11 7
Florida 149 155
Georgia 56 145
Idaho - 17
Illinois 86 115
Indiana - 133
Iowa - 34
Kansas 14 44
Kentucky 3 90
Louisiana 39 22
Maine 1 9
Maryland - 90
Massachusetts 32 26
Michigan 41 145
Minnesota 26 21
Mississippi 21 41
Missouri 16 63
Montana - 13
Nebraska - 30
Nevada - 36
New Hampshire 2 18
New Jersey 2 66
New Mexico - 22
New York - 145
North Carolina 54 119
North Dakota - 6
Ohio 194 170
Oklahoma - 40
Oregon 19 32
Pennsylvania 109 86
Rhode Island - 6
South Carolina - 78
South Dakota - 9
Tennessee - 148
Texas 102 164
Utah - 33
Vermont - 3
Virginia 56 101
Washington 43 14
West Virginia 22 35
Wisconsin - 49
Wyoming - 11
District of Columbia - 6
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1,200 2,997
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INTERNATIONAL WENDY'S
COUNTRY/TERRITORY COMPANY FRANCHISE
Aruba - 3
Bahamas - 4
Canada 105 98
Cayman Islands - 1
China - 1
Dominican Republic - 4
El Salvador - 5
Greece - 8
Guam - 2
Guatemala - 3
Hawaii - 5
Honduras - 5
Hong Kong - 7
Hungary - 1
Iceland - 1
Indonesia - 18
Italy - 2
Japan - 54
Kuwait - 3
Mexico - 8
New Zealand - 6
Oman - 1
Philippines - 31
Poland - 1
Puerto Rico - 19
Saudi Arabia - 14
South Korea - 26
Switzerland - 3
Taiwan - 12
Thailand - 3
Turkey - 4
United Arab Emirates - 2
United Kingdom 6 1
Virgin Islands - 3
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111 359
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TIM HORTONS
DOMESTIC CANADA
FRANCHISE COMPANY FRANCHISE
17 38 1,142
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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 pertained to the Company,
alleged 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 claimed 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 sought 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 defendants' motion to file an interlocutory appeal was
granted. In an opinion dated January 22, 1996, the 11th
Circuit Court of Appeals vacated the reinstatement of the
complaint. The plaintiffs have not filed an appeal or
otherwise sought reconsideration. This case was last
referenced in the Company's Form 10-K for the year ended
January 1, 1995.
On April 12, 1994, Richard Johnson and 12 other
individuals, 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 Georgia. The
complaint alleged that the Company had engaged in racial
discrimination in violation of Title VII and 42 U.S.C.
Section 1981. The plaintiffs further alleged that the
Company conspired with certain of its franchisees to
deprive the plaintiffs and employees of such franchisees of
their rights under 42 U.S.C. Section 1985. The plaintiffs
sought judgment in an undetermined amount against the
Company for punitive and compensatory damages (including
benefits) as well as injunctive and equitable relief,
including reinstatement of the plaintiffs to their former
positions. The complaint was dismissed with prejudice
pursuant to a settlement agreement between the parties. The
final order of settlement was entered by the District Court
on January 2, 1996. The settlement was not material to the
financial condition of the Company. This case was last
referenced in the Company's Form 10-K for the year ended
January 1, 1995.
On April 29, 1994, Mercy Health Services filed a complaint
against the Company in the U.S. District Court for the
Southern District of New York. The plaintiff, a shareholder
of the Company, alleges that the Company wrongfully refused
to include a shareholder resolution in the Company's notice
of proxy and proxy statement for the May 2, 1994 Annual
Meeting of Shareholders. The shareholder resolution
requested the Board of Directors to adopt a policy making
all company restaurants smoke-free by 1995, and requested
that the policy include stipulations that, beginning in
1995, all new franchisees' facilities be smoke-free and all
renewals of franchise agreements include smoke-free
facilities in the agreements. The plaintiff seeks a
declaration that the Company's failure to include the
shareholder resolution in the proxy statement was unlawful,
an injunction which would enjoin the Company from excluding
the plaintiff's shareholder resolution from any future
proxy statements when the resolution otherwise qualifies
for inclusion under the applicable rules of the Securities
and Exchange Commission, and an award for costs, expenses
and attorneys fees. The Company filed a motion for judgment
on the pleadings and the plaintiff filed a cross-motion for
summary judgment. Both motions were denied by the District
Court on November 29, 1994. Discovery is underway in this
case. The Company intends to defend the action vigorously,
and believes that it has meritorious defenses to this
action and that an unfavorable judgment would not have a
material impact upon the financial condition of the
Company. This case was last referenced in the Company's
Form 10-K for the year ended January 1, 1995.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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
1995 High Low Close
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First Quarter $17 5/8 $14 3/8 $16 3/8
Second Quarter 18 7/8 16 17 7/8
Third Quarter 22 3/4 17 21 1/8
Fourth Quarter 22 1/4 19 1/4 21 1/4
1994 High Low Close
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First Quarter $18 3/8 $16 1/4 $17 1/8
Second Quarter 18 1/2 15 1/2 15 3/4
Third Quarter 16 1/2 14 14 1/2
Fourth Quarter 15 3/4 13 1/4 14 3/8
At March 4, 1996, the Company had approximately 64,000
shareholders of record.
DIVIDENDS DECLARED PER SHARE
Quarter 1995 1994
----------------------------------------
First $.06 $.06
Second .06 .06
Third .06 .06
Fourth .06 .06
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Item 6. Selected Financial Data
The following has been restated to reflect the acquisition
of Tim Hortons treated as a pooling of interests.
1995 1994 1993 1992* 1991
OPERATIONS (In millions)
Systemwide sales - Wendy's $4,494.8 4,227.2 3,924.1 3,612.9 3,223.6
Systemwide sales - Hortons $ 541.3 440.4 377.4 340.5 308.1
Retail sales $1,461.9 1,365.7 1,288.5 1,207.0 1,038.6
Revenues $1,746.3 1,591.6 1,482.4 1,381.0 1,186.6
Gross profit** $ 444.6 388.7 343.2 309.7 258.9
Income before income taxes $ 165.1 150.3 118.2 103.8 78.9
Net income $ 110.1 97.4 80.5 66.5 51.9
Capital expenditures $ 217.5 172.4 137.2 139.5 86.3
FINANCIAL POSITION (In millions)
Total assets $1,509.2 1,214.8 1,100.3 1,013.4 965.9
Property and equipment, net $1,006.7 865.2 786.7 745.3 682.2
Long-term obligations $ 337.2 144.9 200.6 233.7 239.6
Shareholders' equity $ 818.8 701.9 623.8 552.9 504.2
PER SHARE DATA
Net income - fully diluted $ .88 .79 .67 .56 .45
Dividends $ .24 .24 .24 .24 .24
Market price at year-end $ 21.25 14.38 17.38 12.63 9.25
* Fiscal year 1992 includes 53 weeks.
** Total revenues less cost of sales, company restaurant
operating costs, and operating costs.
9
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- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
1995 Overview
1995 brought major changes to the composition of Wendy's
International, Inc. (company). The company acquired all the
stock of the parent of the Tim Hortons restaurant chain
(Hortons) on December 29, 1995 (the transaction). (See Note
6 to Consolidated Financial Statements). Hortons is the
second largest restaurant chain in Canada and the largest
chain that features coffee and fresh baked goods such as
donuts, muffins, croissants, cookies, and fancy desserts.
This transaction was accounted for as a pooling of
interests and therefore all financial statements were
restated to reflect the activity of both Wendy's and
Hortons. As a result, the income statement presentation has
been modified to accommodate the combined activities of
both companies.
The net income for prior years has been restated to give
effect to the transaction. The following chart shows
restated net income and the impact of some related special
charges on 1995's net income. The equivalent fully diluted
earnings per share (EPS) is also included.
1995 EPS 1994 EPS 1993 EPS
Net income
as reported $110,070 $ .88 $ 97,432 $.79 $80,517 $.67
Profit sharing 16,299 16,042 12,907
-------- -------- -------
Pro forma
net income 126,369 $1.01 113,474 $.92 93,424 $.77
Special charges 15,365
-------- -------- -------
Net income
before special
charges $141,734 $1.12 $113,474 $.92 $93,424 $.77
-------- -------- -------
The profit sharing item (the pro forma adjustment on the
Consolidated Statement of Income) reflects the add back of
compensation expense, net of taxes, to the sole shareholder
of Hortons. This expense, included as part of special
charges on the Consolidated Statement of Income, occurred
while Hortons was a private company and no similar expense
applies in 1996 and future years. In addition, in 1995
there were significant special charges including legal,
accounting, and professional fees related to the Hortons
transaction, reserves provided for various contingencies,
and costs related to organizing Canadian operations to
blend the Wendy's and Hortons concepts.
Retail Sales
Retail sales, which include sales from company-operated
restaurants and bakery and warehouse sales, grew 7.0% in
1995 over 1994, from $1.366 billion to $1.462 billion, and
grew 6.0% in 1994 compared with 1993. The changes reflect
an increase of 1.3% in average company-operated domestic
net restaurant sales in 1995, and 2.4% in 1994.
Contributing to this were an additional 37, 26, and 32
average Wendy's company-operated domestic restaurants open
during 1995, 1994, and 1993, respectively. Bakery and
warehouse sales also increased 23% in 1995 and 25% in 1994,
in line with an increase in the number of franchised
restaurants serviced.
The improvement in average Wendy's company domestic net
sales was a result of the value menu strategy, such as
Combo Meals, Kids' Meals, and Super Value Menu, and solid
restaurant operations, and effective marketing campaigns.
However, intense competition within the quick-service
restaurant industry continued to adversely affect Wendy's
domestic retail sales, and harsh weather conditions in the
last quarter of 1995 additionally impacted sales. The
average number of transactions in domestic Wendy's
increased approximately .4% in 1995 compared with a 1.2%
increase in 1994, and 4.2% in 1993. Domestic selling prices
increased only .2% during the year, while remaining
unchanged for 1994, and decreasing .4% in 1993, reflecting
the company's continued emphasis on its value strategy.
The following chart reflects average net sales per domestic
Wendy's restaurant for the last three years:
1995 1994 1993
Company $1,014,000 $1,001,000 $978,000
Franchise $ 974,000 $ 982,000 $960,000
Total domestic $ 986,000 $ 988,000 $966,000
Franchise Revenues
Franchise revenues primarily consist of royalties, rental
income, franchise fees, and gains from restaurant
dispositions. Reserves against collection of these
franchise revenues are also provided. The franchise fees
primarily include reimbursement for various company costs
and expenses related to establishing the franchisees'
business, and includes initial equipment packages for
Hortons franchisees.
10
11
Royalties before reserves increased $10.4 million or 8.0%
in 1995, and $12.0 million or 10.2% in 1994. This primarily
reflects an increase in the number of franchise
restaurants. An average of 263 more restaurants were open
in 1995 and an average of 231 more in 1994.
Management reviews reserves on a regular basis and believes
the company has adequate levels for royalty and other
franchise-related receivables and contingencies. When the
outlook changes for reserve levels established in prior
years, they are modified accordingly and the impact is
reflected in general and administrative expense, as
discussed below.
Rental income on restaurants increased $10.7 million in
1995 and $7.3 million in 1994. Rental income increases
reflect the additional number of restaurants being leased
to franchisees. At the end of 1995, 1,257 restaurants were
leased to franchisees, versus 1,055 in 1994, and 818 in
1993.
Franchise fees increased $8.0 million in 1995 and $8.6
million in 1994, reflecting additional franchise
restaurants.
In keeping with the company's continuing strategy of buying
and selling Wendy's restaurants, pretax gains related to
franchising 120 restaurants amounted to $37.8 million in
1995, $11.6 million in 1994 for 49 restaurants, and $8.1
million in 1993 for 86 restaurants. Additionally, pretax
gains resulting from disposition of properties which were
previously leased by franchisees from Wendy's amounted to
$3.8 million in 1995, $2.4 million in 1994, and $.8 million
in 1993.
Cost of Sales and Restaurant Operating Costs
Domestic Wendy's cost of sales increased to 58.7% of retail
sales in 1995 from 58.0% in 1994, and 58.5% in 1993.
Domestic food costs as a percent of domestic retail sales
decreased to 29.1% in 1995 from 29.3% in 1994, and 30.2% in
1993. This reflects favorable purchase prices for key
products such as beef and chicken offset by higher produce
prices during 1995. All key products reflected favorable
pricing during 1994. Bakery and warehouse cost of sales
increased $23.7 million in 1995 and $20.8 million in 1994
reflecting new franchise restaurants serviced.
Domestic Wendy's restaurant labor costs as a percent of
domestic retail sales were 25.6% in 1995 compared with
24.8% in 1994, and 24.5% in 1993. The percentages reflect
increases in restaurant labor due to inflation in the
restaurant labor wage rate, particularly in 1995. The
inflation was driven by demand throughout the industry for
quality labor to provide quality service to customers.
Compounding this problem is the current demographic trend
toward a smaller portion of the population in this targeted
group. The company continues to control labor costs by
adherence to its labor guidelines. Sales per labor hour
increased in both 1995 and 1994 in company restaurants.
Domestic Wendy's company restaurant operating costs
increased $12.6 million in 1995, $11.4 million in 1994, and
$12.0 million in 1993. Domestic operating costs were 26.2%,
26.3%, and 26.6% of retail sales, respectively. As a
percent of sales, costs were consistent in 1995 and 1994.
Improvements during 1994 were seen in advertising,
utilities, and insurance expense.
Domestic Company Operating Margin
Competition in the domestic quick-service restaurant
industry was very intense during the last three years,
particularly focusing on prices. Therefore, while costs of
running the restaurant are subject to normal inflation,
selling prices have remained virtually unchanged. The
average sales increases from domestic Wendy's of 1.3% in
1995 and 2.4% in 1994 were not sufficient to provide
leverage on costs as a percent of retail sales. This, in
conjunction with increasing labor rates resulted in a
domestic operating margin of 15.1% in 1995 versus 15.7% in
1994, the first margin decline since 1989. In 1994, the
margin improved .8% from the prior year with advertising,
utilities, and insurance expense a lower percent of sales.
The following chart details the domestic company operating
margin:
1995 1994 1993
% OF SALES % OF SALES % OF SALES
Retail sales 100.0% 100.0% 100.0%
Cost of sales 58.7% 58.0% 58.5%
Company restaurant operating costs 26.2% 26.3% 26.6%
----- ----- -----
Domestic company operating margin 15.1% 15.7% 14.9%
----- ----- -----
Operating Costs
Operating costs include rent expense related to properties
leased to franchisees, and cost of equipment sold to
Hortons franchisees as part of the initiation of the
franchise business. Training and other costs necessary to
insure a successful Hortons franchise opening, and costs to
operate and maintain the warehouse and bakery operations
are also included in operating costs. Costs that can not be
directly related to generating revenue are included in
general and administrative expenses. Depreciation on
properties owned and leased to franchisees is included in
depreciation expense on the income statement.
The increases in operating costs of $7.8 million, a 14.8%
increase in 1995, and $8.3 million, an 18.7% increase in
1994 were due to the addition of restaurants leased to
franchisees. There were 202 more restaurants under
franchise lease arrangements in 1995 than in 1994, and 237
more in 1994 than 1993.
11
12
General and Administrative Expenses
General and administrative expenses were $136.4 million or
7.8% of revenues for the year 1995 compared with $120.6
million or 7.6% for 1994, and $113.0 million or 7.6% for
1993. Salaries and related benefits, the largest component
of general and administrative expenses, increased $7.7
million in 1995 and $8.4 million in 1994. This primarily
reflects annual merit-based employee compensation increases
and administrative staff additions to support the rapid
growth of Hortons in Canada and international and domestic
Wendy's growth. Insurance expense declined $3.1 million in
1994 as the prior year included an additional $4.0 million
accrual to reflect trends in domestic year-end 1993's
workers' compensation and general liability claims.
As a result of continuing improvement in the financial
strength of the Wendy's franchise community, net reserve
reversals reduced expenses by $1.2 million in 1995, $2.1
million in 1994, and $2.2 million in 1993.
Special Charges
The Hortons transaction resulted in unusual expenses being
realized. Compensation expense was paid to the sole
shareholder of Hortons and amounted to $29.6 million in
1995, $28.9 million in 1994, and $23.3 million in 1993.
Various legal, accounting, and other professional fees of
$4.0 million were incurred to effectuate the Hortons
transaction. Additionally, reserves of $13.5 million were
provided for possible environmental issues and
contingencies. Other costs were incurred related to
organizing Canadian operations to efficiently blend the
Wendy's and Hortons concepts.
Interest
Net interest expense decreased in 1995 and 1994 primarily
as a result of lower interest expense of $20.5 million in
1995 compared with $22.2 million in 1994, and $23.6 million
in 1993. Interest expense was reduced due to debt
retirements of Wendy's related borrowings, partly offset by
higher interest expense on loans to support Hortons growth.
Income Taxes
The effective income tax rate for 1995 was 33.3% compared
with 35.2% for 1994, and 31.9% in 1993. In 1993, the
company generated a Canadian tax benefit of $6.0 million as
a result of regionalizing Canadian operations. A tax
benefit of $6.6 million related to Canadian operations was
realized in 1995 pursuant to further successful
developments related to the 1993 Canadian reorganization.
FINANCIAL POSITION
Overview
Total assets increased $294.4 million or 24.2% over 1994
primarily due to additions to property and equipment for
restaurant development. Total cash and short-term
investments amounted to $213.8 million at year-end 1995
compared with $142.9 million at year-end 1994. The increase
primarily reflects the issuance of $100 million 6.35%,
ten-year Notes and $100 million 7%, 30-year Debentures at
the end of 1995 net of $50 million note repayment in early
1995. Long-term notes receivable from restaurant
dispositions during 1995 were $37 million. Income taxes
payable reflects prepayment of income taxes which will be
recovered in early 1996. Return on average assets, without
special charges previously discussed, was 17.1% in 1995
compared with 17.5% in 1994.
Long-term debt increased in 1995 reflecting the issuance of
the $200 million additional debt, net of $7.0 million
representing interest rate hedges and discount. Offsetting
this was the repayment of the $50 million note. The
long-term debt to equity ratio increased to 41% for
year-end 1995 compared to 21% at year-end 1994.
The company's return on average equity was 18.3% in 1995
compared with 16.7% in 1994. As with the return on average
assets, this return is calculated excluding the special
charges previously discussed.
The following chart shows year-end reserve balances related
to royalty receivables and other franchise-related
receivables and contingencies by balance sheet category:
DECEMBER 31, JANUARY 1,
(in millions) 1995 1995
Accounts receivable, net $ 7.4 $ 7.1
Notes receivable, net .6 .8
Other assets 2.5 2.3
Accrued expenses, other .3 .6
----- -----
$10.8 $10.8
----- -----
12
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Cash Flow
Cash provided by operating activities was $164.9 million in
1995, $168.0 million in 1994, and $151.3 million in 1993.
Over the past three years, cash provided by operating
activities was primarily used for capital expenditures,
dividend payments, debt repayment, and acquisitions of
franchised restaurants. During this time, the company
acquired 149 Wendy's restaurants and repaid $214.5 million
in debt.
Cash proceeds of $40.4 million were realized in 1995 from
the sale of Wendy's company-operated restaurants to
franchisees, while $21.1 million was provided in 1994, and
$17.2 million in 1993. The company issued $200 million of
additional long-term debt in 1995.
During 1995, capital expenditures amounted to $217.5
million. New restaurant expenditures amounted to $123.5
million; $54.3 million was spent for improvements to
existing restaurants; and $39.7 million was spent for other
additions. These included Hortons expenditures of $40.3
million for new restaurant development, which are leased to
franchisees. Current plans are to open or have under
construction about 475 new Wendy's restaurants, of which
approximately 150 will be company-operated Wendy's sites,
and 273 new Hortons in 1996. Capital expenditures could
total as much as $345 million in 1996 including
approximately $52 million for Hortons. Cash provided by
operating activities, cash and investments on hand,
existing revolving credit agreements, and possible asset
dispositions should enable the company to meet its
financial requirements through 1996. If additional cash is
needed for capital expenditures, future acquisitions of
restaurants from franchisees, or for other corporate
purposes, the company believes it would be able to obtain
additional cash through existing revolving credit
agreements, new revolving credit agreements which the
company believes it could execute, or through the issuance
of debt securities.
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
Hortons is the second largest quick-service restaurant
chain in Canada and at year end had 1,197 restaurants.
These include standard full-size restaurants, satellites,
drive-through-only units, and kiosks/Essos sites. In total,
273 sites opened in 1995. The average sales at standard
restaurants were $641,000 (U.S. dollars) in 1995, an
increase of 2.9%. The company believes there are
significant opportunities to expand the Hortons concept
throughout Canada, and eventually perhaps other
international markets. Future expansion should primarily be
through franchising, and the company plans to open, or have
under construction, 273 Hortons units in 1996.
Canada is the largest international market for the Wendy's
concept, and like domestic markets, the restaurant industry
is extremely competitive. The environment includes a
difficult economy, adverse tax laws, and minimum wage
increases. It was a productive year in 1995 as average net
sales of company-operated restaurants increased 5.9% in
local currency, following a 5.9% increase a year ago. In
1995, 13 company-operated Wendy's and 15 franchised Wendy's
opened in Canada, bringing the total restaurants to 203 at
year end. The company plans to have open as many as 50 new
restaurants in 1996. Included in these restaurants are
combination units of Wendy's and Hortons which have proven
successful with 23 units open at the end of 1995, and plans
to develop as many as 25 more in 1996. The combination
units are also being tested in U.S. markets, with one unit
open at year end and seven planned for 1996.
The company's expansion of the Wendy's concept outside
Canada continued with 42 new restaurants open, including
the 54th restaurant in Japan, the company's second largest
international market. International growth continues to be
primarily through franchising, but joint ventures will also
be utilized, and parts of England are being developed as
company-operated Wendy's markets. The company anticipates
opening or having under construction 100 new Wendy's in
international markets outside Canada in 1996. Approximately
half of these are planned for Asia.
The company intends to accelerate all international
development in 1996 and beyond. At year-end 1995 there were
470 Wendy's and 1,180 Hortons open outside the U.S. The
company anticipates opening or having under construction
150 international Wendy's and 273 Hortons in 1996.
MANAGEMENT'S OUTLOOK
The company anticipates 1996 to be even more challenging
than 1995 given increased price competition, the difficulty
in obtaining quality employees, increased marketing costs
and continued efforts to insure food safety.
The company continued to adhere to the basic strategies
begun seven years ago and consumers have come to expect
quality and value from Wendy's and Tim Hortons. The company
believes that by focusing on areas which can be controlled
and improved, such as quality food, quality service and
value pricing, customers will recognize the difference and
prefer Wendy's and Tim Hortons over the competition.
13
14
The company is still committed to aggressive but
responsible growth. The company plans on opening or having
under construction 150 new Wendy's company-owned
restaurants and 325 new Wendy's franchise restaurants in
1996, along with 273 new Hortons. This expansion will be
accomplished by use of cash and investments on hand, cash
provided by 1996 operations, existing revolving credit
agreements, potential asset dispositions, and possible
borrowings.
The Hortons concept has been developed primarily by
franchising restaurants. The company anticipates that, at
least in the near term, development will remain primarily
franchised. While Hortons currently operates almost
entirely in Canada, future expansion will include domestic
and possibly other international markets.
The company will continue its strategy of acquiring Wendy's
restaurants from and selling Wendy's restaurants to
franchisees where prudent. Acquired restaurants, which may
be underperforming, can be improved and then operated
profitably by the company or sold to a qualified
franchisee. Franchised Wendy's restaurants may also be
acquired due to geographic or operational benefits to
existing company-operated markets. Selling restaurants
generates cash which is used for new development,
acquisitions, and remodeling programs. During the last
three years, the company purchased 149 Wendy's franchised
restaurants and sold 255 company-operated Wendy's
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 of the system's franchise community is an
essential part of the company's continued success.
Strategies already proven successful are aimed at
encouraging responsible new restaurant development,
increasing franchise financial health, increasing royalty
income, and improving royalty receivable collection rates.
The company will continue to maintain appropriate reserves
against franchise receivables.
Competition within the quick-service restaurant industry
remains extremely intense, particularly in areas of pricing
and advertising. Additionally, however, numerous external
factors can have a significant influence on the company's
performance. These factors could include the economy,
consumer perceptions of food safety, harsh weather,
particularly in the first and fourth quarters, changing
consumer tastes, the labor supply, legal claims, risks
inherent to international development, the company's
ability to obtain and finance real estate, and government
initiatives such as minimum wage rates, taxes, and possible
franchise legislation.
Financial Accounting Standard Number 121 (SFAS 121) -
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" was issued in March
1995. This statement requires that long-lived assets and
certain identifiable intangibles being held and used by an
entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Additionally, the
statement requires that long-lived assets and certain
identifiable intangibles being disposed of be reported at
the lower of carrying amount or fair value less cost to
sell. The company is in the process of evaluating the
impact of this statement on the results of operations and
financial condition of the company. Also in October 1995,
Financial Accounting Standard Number 123 (SFAS 123) -
"Accounting for Stock-Based Compensation" was issued. This
pronouncement establishes the accounting and reporting
standards for stock-based employee compensation plans. This
new standard defines a fair value-based method of
accounting for these equity instruments. Companies may
elect to adopt this standard or to continue accounting for
these types of equity instruments under current guidance,
APB Opinion No. 25, "Accounting for Stock Issued to
Employees," (Opinion 25). Companies which elect to continue
using the rules of Opinion 25 must make pro forma
disclosures of net income and earnings per share as if this
new statement had been applied. The company is in the
process of evaluating the impact of this statement on the
results of operations and financial condition of the
company. Both new standards are required for fiscal years
beginning after December 15, 1995.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Years ended December 31, 1995, January 1, 1995, and January 2, 1994
(In thousands, except per share data) 1995 1994 1993
Revenues
Retail sales $1,461,880 $1,365,723 $1,288,532
Franchise revenues 284,400 225,864 193,853
---------- ---------- ----------
1,746,280 1,591,587 1,482,385
---------- ---------- ----------
Costs and expenses
Cost of sales 890,363 817,500 772,790
Company restaurant operating costs 351,062 332,880 322,163
Operating costs 60,216 52,461 44,200
General and administrative expenses 136,424 120,621 113,032
Depreciation and amortization of
property and equipment 80,573 74,538 71,071
Other expenses 2,595 1,220 4,242
Special charges 49,672 28,905 23,256
Interest, net 10,230 13,169 13,390
---------- ---------- ----------
1,581,135 1,441,294 1,364,144
---------- ---------- ----------
Income before income taxes 165,145 150,293 118,241
Income taxes 55,075 52,861 37,724
---------- ---------- ----------
Net income $ 110,070 $ 97,432 $ 80,517
========== ========== ==========
Pro forma adjustment for profit sharing
expense (net of income taxes of
$13,336, $12,863, and $10,349) 16,299 16,042 12,907
---------- ---------- ----------
Pro forma net income $ 126,369 $ 113,474 $ 93,424
---------- ---------- ----------
Primary earnings per share $ .90 $ .81 $ .68
---------- ---------- ----------
Fully diluted earnings per share $ .88 $ .79 $ .67
---------- ---------- ----------
Pro forma primary earnings per share $ 1.04 $ .94 $ .78
---------- ---------- ----------
Pro forma fully diluted earnings per share $ 1.01 $ .92 $ .77
---------- ---------- ----------
Dividends per share $ .24 $ .24 $ .24
---------- ---------- ----------
Primary shares 122,041 120,588 119,247
---------- ---------- ----------
Fully diluted shares 130,230 128,718 127,595
---------- ---------- ----------
The accompanying notes beginning on page 19 are an integral part of
the Consolidated Financial Statements.
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16
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1995, and January 1, 1995
(Dollars in thousands) 1995 1994
Assets
Current assets
Cash and cash equivalents $ 206,127 $ 119,639
Short-term investments, at market 7,682 23,235
Accounts receivable, net 49,555 41,568
Notes receivable, net 12,272 10,457
Deferred income taxes 18,389 10,807
Inventories and other 27,254 26,941
----------- -----------
321,279 232,647
----------- -----------
Property and equipment, at cost
Land 288,029 251,515
Buildings 471,599 407,408
Leasehold improvements 251,176 214,974
Restaurant equipment 383,701 349,195
Other equipment 65,643 64,929
Capital leases 67,420 63,531
----------- -----------
1,527,568 1,351,552
Accumulated depreciation and amortization (520,824) (486,399)
----------- -----------
1,006,744 865,153
----------- -----------
Cost in excess of net assets acquired, net 42,927 30,780
Deferred income taxes 19,233 16,142
Other assets 118,978 70,083
----------- -----------
$ 1,509,161 $ 1,214,805
----------- -----------
Liabilities and Shareholders' Equity
Current liabilities
Accounts and drafts payable $ 108,182 $ 100,708
Accrued expenses
Salaries and wages 23,158 22,473
Taxes 20,828 17,480
Insurance 29,320 26,037
Other 24,207 20,063
Income taxes (2,516) 1,683
Due to officer 63,221 39,992
Current portion of long-term obligations 29,469 57,674
----------- -----------
295,869 286,110
----------- -----------
Long-term obligations
Term debt 297,029 104,842
Capital leases 40,200 40,018
----------- -----------
337,229 144,860
----------- -----------
Deferred income taxes 47,853 39,799
Other long-term liabilities 9,431 13,823
Due to officer 28,286
Commitments and contingencies
Shareholders' equity
Preferred stock, authorized: 250,000 shares
Common stock, $.10 stated value, authorized: 200,000,000 shares
Issued: 103,993,000 and 101,787,000 shares, respectively 10,399 10,179
Capital in excess of stated value 199,804 171,888
Retained earnings 614,799 529,294
Unrealized loss on investments (1,504) (723)
Translation adjustments (3,007) (3,787)
Pension liability adjustment (3,212)
----------- -----------
820,491 703,639
Treasury stock at cost: 129,000 shares (1,712) (1,712)
----------- -----------
818,779 701,927
----------- -----------
$ 1,509,161 $ 1,214,805
----------- -----------
The accompanying notes beginning on page 19 are an integral part of the
Consolidated Financial Statements.
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17
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31, 1995, January 1, 1995, and January 2, 1994
(In thousands) 1995 1994 1993
Cash flows from operating activities
Net income $ 110,070 $ 97,432 $ 80,517
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 84,452 80,194 74,394
Deferred income taxes (4,393) (2,082) (7,002)
Net gain from restaurant dispositions (37,810) (11,588) (8,140)
Net loss (gain) on other asset dispositions 760 (68) 5,449
Net reserves for receivables and other contingencies 15,424 1,403 (747)
Changes in operating assets and liabilities net of effects
of acquisitions and dispositions of restaurants
Accounts and notes receivable (11,091) (12,673) (4,064)
Inventories and other (1,245) (616) (5,178)
Accounts and drafts payable and accrued expenses 10,910 12,440 14,382
(Increase) decrease in other assets (3,243) (82) (305)
Income taxes (3,540) (1,225) (4,356)
Other changes, net 4,603 4,860 6,348
--------- --------- ---------
Net cash provided by operating activities 164,897 167,995 151,298
--------- --------- ---------
Cash flows from investing activities
Proceeds from restaurant dispositions 40,412 21,065 17,155
Proceeds from other asset dispositions 19,139 18,621 13,484
Capital expenditures (217,532) (172,427) (137,202)
Acquisition of franchises (42,746) (12,761) (8,685)
Proceeds from (investment in) marketable securities 14,509 20,694 (2,208)
Other investing activities (1,519) (1,884) (2,235)
--------- --------- ---------
Net cash used in investing activities (187,737) (126,692) (119,691)
--------- --------- ---------
Cash flows from financing activities
Proceeds from issuance of term debt 285,410 10,488
Proceeds from issuance of common stock 20,653 7,360 12,890
Principal payments on long-term obligations (169,017) (5,581) (39,853)
Dividends paid (24,565) (25,071) (23,826)
(Payment) loan due officer, net (5,057) 22,005 12,643
Other financing activities 1,428 (2,284) 929
--------- --------- ---------
Net cash provided by (used in) financing activities 108,852 6,917 (37,217)
--------- --------- ---------
Effect of exchange rate changes on cash 476 (279) (104)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 86,488 47,941 (5,714)
--------- --------- ---------
Cash and cash equivalents at beginning of period 119,639 71,698 77,412
--------- --------- ---------
Cash and cash equivalents at end of period $ 206,127 $ 119,639 $ 71,698
--------- --------- ---------
Supplemental disclosures of cash flow information
Interest paid $ 19,939 $ 21,478 $ 23,725
--------- --------- ---------
Interest received 10,040 8,512 8,832
--------- --------- ---------
Income taxes paid 53,364 55,614 41,798
--------- --------- ---------
Debt converted to common stock 84 1,510
--------- --------- ---------
Capital lease obligations incurred 7,717
--------- --------- ---------
Acquisition of franchises
Fair value of assets acquired, net 67,291 15,859 13,170
--------- --------- ---------
Cash paid 42,746 12,761 8,685
--------- --------- ---------
Liabilities assumed 24,850 3,098 4,485
--------- --------- ---------
The accompanying notes beginning on page 19 are an integral part of the
Consolidated Financial Statements.
17
18
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended December 31, 1995, January 1, 1995, and January 2, 1994
(In thousands) 1995 1994 1993
Common stock at stated value
Balance at beginning of period $ 10,179 $ 10,082 $ 9,885
Exercise of options 220 97 188
Conversion of subordinated debentures 9
--------- --------- ---------
Balance at end of period 10,399 10,179 10,082
--------- --------- ---------
Capital in excess of stated value
Balance at beginning of period 171,888 162,122 142,442
Exercise of options, including tax benefits 27,832 9,766 18,179
Conversion of subordinated debentures 84 1,501
--------- --------- ---------
Balance at end of period 199,804 171,888 162,122
--------- --------- ---------
Retained earnings
Balance at beginning of period 529,294 456,933 400,242
Net income 110,070 97,432 80,517
Dividends paid (24,565) (25,071) (23,826)
--------- --------- ---------
Balance at end of period 614,799 529,294 456,933
--------- --------- ---------
Unrealized loss on investments (1,504) (723)
--------- --------- ---------
Translation adjustments (3,007) (3,787) (1,060)
--------- --------- ---------
Pension liability adjustment (3,212) (2,572)
--------- --------- ---------
Treasury stock at cost (1,712) (1,712) (1,712)
--------- --------- ---------
Shareholders' equity $ 818,779 $ 701,927 $ 623,793
--------- --------- ---------
Common shares
Balance issued at beginning of period 101,787 100,823 98,855
Exercise of options 2,200 964 1,882
Conversion of subordinated debentures 6 86
--------- --------- ---------
Balance issued at end of period 103,993 101,787 100,823
--------- --------- ---------
Treasury shares (129) (129) (129)
--------- --------- ---------
Common shares issued and outstanding 103,864 101,658 100,694
--------- --------- ---------
Common shares issuable upon
conversion of exchangeable shares 16,450 16,450 16,450
--------- --------- ---------
Common shares issued, issuable, and
outstanding 120,314 118,108 117,144
--------- --------- ---------
The accompanying notes beginning on page 19 are an integral part of the
Consolidated Financial Statements.
18
19
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 1995 the company and its
franchise owners operated 4,667 of these restaurants under the name "Wendy's" in
50 states and in 33 other countries and territories.
Additionally, the company and its franchise owners operated 1,197
restaurants under the name "Tim Hortons" in Canada with 17 units open in the
United States.
Fiscal year
The company's fiscal year ends on the Sunday nearest to December 31.
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.
Certain reclassifications have been made for prior years to conform with
the 1995 presentation.
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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
The pro forma adjustment to the Consolidated Statement of Income represents
the profit sharing contribution made to the sole shareholder of Hortons prior to
the acquisition discussed in Note 6. This amounted to $29.6 million, or $16.3
million after tax in 1995, $28.9 million, or $16.0 million after tax in 1994,
and $23.3 million, or $12.9 million after tax in 1993. Profit sharing is
included in special charges on the Consolidated Statement of Income. In 1995,
there were other costs in special charges which included legal, accounting, and
other professional fees of $4.0 million to effectuate the Hortons transaction.
Also, reserves of $13.5 million for possible environmental issues and
contingencies, and miscellaneous costs to organize Canadian operations to
efficiently blend the Wendy's and Hortons concepts are included.
Due to officer of $63.2 million and $68.3 million (both current and
long-term portions) as of December 31, 1995, and January 1, 1995, respectively,
primarily represents profit sharing contributions and demand notes payable to
the former sole shareholder of Hortons.
Inventories
Inventories, amounting to $15.0 million and $13.8 million at December 31,
1995, and January 1, 1995, respectively, are stated at the lower of cost
(first-in, first-out) or market, and consist primarily of restaurant food items,
new equipment and parts, 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. The
company periodically reviews goodwill and, based upon undiscounted cash flows,
impairments will be recognized when a permanent decline in value has occurred.
Accumulated amortization of cost in excess of net assets acquired was $16.6
million and $14.8 million at December 31, 1995, and January 1, 1995,
respectively.
Pre-opening costs
The company capitalizes certain operating costs which are incurred prior to
the opening of a new restaurant. These costs are amortized over a one-year
period.
Capitalized software development costs
The company capitalizes internally developed software costs which are
amortized over a seven-year period.
Advertising costs
The company recognizes advertising costs as incurred.
Franchise operations
The company grants franchises to independent operators who in turn pay
technical assistance/franchise fees which may include equipment, royalties, and
in some cases, rents for each restaurant opened. A technical
assistance/franchise fee is recorded as income when each restaurant commences
operations. Royalties, based upon a percent of monthly net sales, are recognized
as income on the accrual basis. The company has established reserves related to
the collection
19
20
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 $72.6 million and $31.0 million at December 31, 1995,
and January 1, 1995, 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 December 31, 1995, the company and its franchise owners operated 203
Wendy's restaurants and 1,180 Tim Hortons restaurants in Canada. Additionally,
267 Wendy's restaurants were operated by franchise owners in other foreign
countries and territories. The functional currency of each foreign subsidiary is
the respective local currency.
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.
Financial Accounting Standards Board Statement
Financial Accounting Standard Number 121 (SFAS 121) - "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" was
issued in March 1995. The company is in the process of evaluating the impact of
this statement on the results of operations and financial condition of the
company.
NOTE 2 TERM DEBT
Term debt at each year-end consisted of the following:
(In thousands) 1995 1994
Notes, unsecured, and
Mortgages Payable with a
weighted average interest
rate of 6.0%, due in
installments through 2010 $ 27,351 $ 5,465
Industrial Development
Revenue Bonds, with a
weighted average interest
rate of 11.1%, due in
installments through 2002 761 1,624
121/8% Notes, due April 1, 1995 49,995
7% Convertible
Subordinated Debentures,
due April 1, 2006 99,915 100,000
6.35% Notes, due December 15, 2005 96,251
7% Debentures,
due December 15, 2025 96,429
--------- ---------
320,707 157,084
Current portion (23,678) (52,242)
--------- ---------
$ 297,029 $ 104,842
--------- ---------
The industrial development revenue bonds were issued to provide funds for
the acquisition, construction, and improvement of various restaurants.
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 6.35% notes and 7% debentures are unsecured and unsubordinated. They
are not redeemable by the company prior to maturity.
The company entered into interest rate swaps to manage its exposure to
interest rate fluctuations on the 6.35% and 7% securities issued in December
1995. The company reflects realized and unrealized gains and losses on hedging
instruments as an adjustment to the carrying value of the hedged asset or
liability. Accordingly, losses related to these interest rate swaps amounting to
$3.6 million and $3.4 million, respectively, have been recorded as a reduction
of the carrying value of the notes and debentures and will be amortized to
interest expense over the term of the related debt.
Based on quoted market prices for the convertible subordinated debentures
and future cash flows for all other term debt, the fair value of total term debt
was approximately $394 million at December 31, 1995, and $185 million at January
1, 1995.
The combined aggregate amounts of future maturities for all term debt are
as follows:
(In thousands)
1996 $ 23,678
1997 295
1998 222
1999 210
2000 171
Later years 296,131
--------
$320,707
--------
20
21
At year-end, the company had unused contractual lines of credit aggregating
$100 million from various financial institutions, generally at their respective
prime rates.
Net interest expense for each year consisted of the following:
(In thousands) 1995 1994 1993
Total interest charges $ 20,456 $ 22,176 $ 23,552
Interest income (10,226) (9,007) (10,162)
-------- -------- --------
$ 10,230 $ 13,169 $ 13,390
-------- -------- --------
NOTE 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) 1995 1994
Buildings $ 67,420 $ 63,531
Accumulated amortization (33,967) (31,764)
-------- --------
$ 33,453 $ 31,767
-------- --------
At December 31, 1995, 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
1996 $ 9,466 $ 41,110
1997 9,052 39,687
1998 8,220 38,218
1999 6,545 35,072
2000 4,801 31,271
Later years 32,654 215,262
-------- --------
Total minimum lease payments 70,738 $400,620
--------
Amount representing interest (24,747)
--------
Present value of net minimum lease
payments 45,991
Current portion (5,791)
--------
$ 40,200
--------
Total minimum lease payments have not been reduced by minimum sublease
rentals of $1.3 million under capital leases, and $233.8 million under operating
leases due in the future under noncancelable subleases.
Rent expense for each year is primarily included in company restaurant
operating costs and amounted to:
(In thousands) 1995 1994 1993
Minimum rents $45,142 $41,348 $39,649
Contingent rents 9,709 8,589 8,452
------- ------- -------
$54,851 $49,937 $48,101
------- ------- -------
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) 1995 1994
Total minimum lease receipts $ 37,206 $ 36,315
Estimated residual value 4,618 4,542
Amount representing
unearned interest (19,579) (19,659)
Current portion, included
in accounts receivable (979) (927)
-------- --------
$ 21,266 $ 20,271
-------- --------
21
22
At each year-end assets leased under operating leases consisted of the
following:
(In thousands) 1995 1994
Land $ 97,581 $ 78,789
Building 184,394 144,980
Equipment 29,659 26,401
--------- ---------
311,634 250,170
Accumulated amortization (72,184) (62,479)
--------- ---------
$ 239,450 $ 187,691
--------- ---------
At December 31, 1995, future minimum lease receipts were as follows:
Financing Operating
(In thousands) Leases Leases
1996 $ 3,018 $ 33,560
1997 3,080 32,130
1998 3,085 30,181
1999 2,980 28,049
2000 2,918 25,798
Later years 22,125 80,587
------- --------
$37,206 $230,305
------- --------
Rental income for each year is included in franchise revenues and amounted
to:
(In thousands) 1995 1994 1993
Minimum rents $28,612 $23,140 $20,206
Contingent rents 33,542 27,462 23,102
------- ------- -------
$62,154 $50,602 $43,308
------- ------- -------
NOTE 4 INCOME TAXES
The provision for income taxes for each year consisted of the following:
(In thousands) 1995 1994 1993
Current
Federal $ 51,641 $ 49,802 $ 39,512
State and local 3,864 4,403 3,126
Foreign 3,963 738 2,088
-------- -------- --------
59,468 54,943 44,726
-------- -------- --------
Deferred
Federal 7,724 (1,418) (243)
State and local (476) (213) (127)
Foreign (11,641) (451) (6,632)
-------- -------- --------
(4,393) (2,082) (7,002)
-------- -------- --------
$ 55,075 $ 52,861 $ 37,724
-------- -------- --------
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 at each year-end consisted of the following:
(In thousands) 1995 1994
Deferred tax assets
Lease transactions $ 3,996 $ 4,285
Reserves not currently deductible 18,896 12,468
Foreign operations 14,748 13,794
All other 2,390 6,654
-------- --------
40,030 37,201
Valuation allowance (1,466) (7,144)
-------- --------
$ 38,564 $ 30,057
-------- --------
Deferred tax liabilities
Lease transactions $ 8,264 $ 8,128
Property and equipment
basis differences 30,049 29,356
Installment sales 7,540 1,605
All other 2,942 3,818
-------- --------
$ 48,795 $ 42,907
-------- --------
A deferred tax asset for foreign operations was established, upon the
adoption of SFAS 109, for excess capital allowances and net operating loss
carryovers which are primarily related to a Canadian subsidiary. This deferred
tax asset was largely offset by a valuation allowance. As a result of the
regionalization and legal entity restructuring of Canadian operations and the
acquisition of Tim Hortons, the company reduced the valuation allowance by $7.3
million, $279,000, and $6.0 million in 1995, 1994 and 1993, respectively,
primarily due to the realization of Canadian tax benefits.
22
23
A reconciliation of the statutory U.S. Federal income tax rate of 35% to
the company's effective tax rate for each year is shown below:
(In thousands) 1995 1994 1993
Income taxes at statutory rate $ 57,801 $ 52,602 $ 41,384
Effect of foreign operations (2,993) (853) 1,229
State and local taxes, net of
federal benefit 2,209 2,737 1,949
Canadian restructuring benefit (3,936) (279) (6,000)
Jobs and other tax credits (270) (722) (456)
Tax-exempt interest (506) (616) (537)
Goodwill amortization 426 407 526
Other 2,344 (415) (371)
-------- -------- --------
Income taxes at effective rate $ 55,075 $ 52,861 $ 37,724
-------- -------- --------
NOTE 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 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 4.6 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 3, 1995, August 9, 1994, and August
5, 1993, approximately 785,000 options, 865,000 options, and 860,000 options
were granted to eligible employees at an exercise price of $18.31 per share,
$15.38 per share, and $14.38 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, and
February 23, 1994. An aggregate of 12.5 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 3, 1995, August 9, 1994, and August 5, 1993, approximately 1.3
million options, 1.3 million options, and 1.1 million options were granted to
key employees at an exercise price of $18.31 per share, $15.38 per share, and
$14.38 per share, respectively.
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 January 3, 1993 8,892 $ 4.06-$13.69
Granted 2,091 14.38- 16.44
Exercised (1,882) 4.13- 12.56
Canceled (560)
------- -------------
Balance at January 2, 1994 8,541 4.06- 16.44
Granted 2,500 15.38- 18.06
Exercised (964) 4.06- 14.38
Canceled (423)
------ -------------
Balance at January 1, 1995 9,654 5.13- 18.06
Granted 2,262 18.31- 20.13
Exercised (2,200) 5.13- 18.31
Canceled (414)
------- -------------
Balance at December 31, 1995 9,302 $ 5.13-$20.13
------- -------------
Options exercisable to purchase common shares totaled 4.2 million, 4.6
million, and 3.1 million at December 31, 1995, January 1, 1995, and January 2,
1994, respectively. Shares reserved under the plans at each year-end were 12.5
million in 1995, 14.1 million in 1994, and 10.5 million in 1993.
The company has a Shareholder Rights Plan (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 15 percent or more of the company's common shares, or ten days after a
tender offer for 15 percent or more of the common shares is announced (these
thresholds were 20 percent until the Rights Plan was amended effective December
29, 1995). No certificates will be issued unless the Rights Plan is activated.
23
24
Under certain circumstances, all Rights holders, except the person or
company holding 15 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.
In October 1995, Financial Accounting Standard Number 123 (SFAS 123) -
"Accounting for Stock-Based Compensation" was issued. This pronouncement
establishes the accounting and reporting standards for stock-based employee
compensation plans. This new standard defines a fair value-based method of
accounting for these equity instruments. Companies may elect to adopt this
standard or to continue accounting for these types of equity instruments under
current guidance, APB Opinion No. 25, "Accounting for Stock Issued to
Employees," (Opinion 25). Companies which elect to continue using the rules of
Opinion 25 must make pro forma disclosures of net income and earnings per share
as if this new statement had been applied. This new standard is required for
fiscal years beginning after December 15, 1995. The company is in the process of
evaluating the impact of this statement on the results of operations and
financial condition of the company.
NOTE 6 ACQUISITIONS
On December 29, 1995, the company acquired all of the stock of 1052106
Ontario Limited (Ontario), formerly 632687 Alberta Ltd., the parent company of
the Tim Hortons donut restaurant chain, for 16.45 million shares of a Canadian
subsidiary of the company exchangeable for 16.45 million common shares of
Wendy's International, Inc. Tim Hortons is the leading franchisor of bakery and
coffee shops in Canada. The transaction has been accounted for as a pooling of
interests and, accordingly, the consolidated financial statements for all
periods presented have been restated to include the accounts of Tim Hortons.
Certain adjustments were made to Tim Hortons financial statements to conform to
the same accounting practices as the company.
Revenues and net income of the separate companies for the periods preceding
the acquisition consisted of the following:
(In thousands) WENDY'S TIM HORTONS TOTAL
1995
Revenues $1,507,925 $238,355 $1,746,280
Net income 111,632 (1,562) 110,070
1994
Revenues 1,403,420 188,167 1,591,587
Net income 97,156 276 97,432
1993
Revenues 1,329,339 153,046 1,482,385
Net income 79,267 1,250 80,517
In connection with the acquisition, $4.0 million in professional fees to
effectuate the transaction were incurred and have been charged to expense in the
fourth quarter of 1995.
Additionally during 1995, the company acquired 33 restaurants in the Little
Rock market for cash of $37.0 million and 47 restaurants in the Pittsburgh
market for $4.0 million cash and notes of $23.0 million. Three other restaurants
were acquired for $1.7 million during 1995.
During 1994, the company acquired 29 restaurants in the Kansas City market
for cash of $10.5 million and the assumption of certain liabilities. The company
acquired four other domestic restaurants from franchisees for $2.3 million
during 1994, and 33 domestic restaurants for $8.7 million during 1993.
NOTE 7 DISPOSITIONS
The company franchised 118 domestic and two Canadian restaurants during
1995. Additionally, 49 and 86 domestic restaurants were franchised in 1994 and
1993, respectively. These transactions resulted in pretax gains of approximately
$37.8 million, $11.6 million, and $8.1 million in 1995, 1994, and 1993,
respectively, and are included in franchise revenues.
Notes receivable related to dispositions were $63.6 million at December 31,
1995, and $25.9 million at January 1, 1995, and are included in notes receivable
and other assets.
NOTE 8 COMMITMENTS AND CONTINGENCIES
At December 31, 1995, and January 1, 1995, the company's reserves
established for doubtful royalty receivables were $3.6 million and $4.3 million,
respectively. Reserves related to possible losses on notes receivable, real
estate, guarantees, claims, and contingencies involving franchisees totaled $7.2
million at December 31, 1995, and $6.5 million at January 1, 1995. 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 $16.5 million over the next three
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.
24
25
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.
The company has undertaken to complete environmental assessments of its
properties belonging to one of its Canadian subsidiaries. Although the ultimate
amount of reclamation obligations to be incurred is uncertain, the company
estimates such amounts, representing assessment, cleanup, and remediation costs,
at $11.7 million. This amount has been charged to operations in the third
quarter of 1995.
NOTE 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 rate of 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. Effective April 1,
1995, the defined contribution plan allows for 401(k) contributions, acceptance
of qualified rollovers, a loan feature, and a choice of four investing options,
one of which is common stock of the company. In addition, the retirement program
includes a noncontributory defined benefit pension plan for all eligible crew
employees and shift supervisors 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) 1995 1994
Accumulated benefit obligation:
Vested $(34,811) $(27,537)
Nonvested $ (4,035) $ (2,978)
Projected benefit obligation $(41,763) $(32,700)
Fair value of plan assets 41,354 29,822
Unrecognized net transition asset (192) (384)
Unrecognized net loss 6,579 8,047
Unrecognized prior service costs 142 189
Minimum pension adjustment (5,390)
-------- --------
Prepaid pension cost (liability) $ 6,120 $ (416)
-------- --------
In determining the present value of benefit obligations, discount rates of
7.0% and 8.0% were used in 1995 and 1994, respectively. The expected long-term
rate of return on assets used was 8.5% in 1995 and 1994. The assumed rate of
increase in compensation levels was 8.0% for 1995 and 1994. Plan assets as of
December 31, 1995, consisted of debt and equity instruments and cash
equivalents.
Net periodic pension cost for each year consisted of the following:
(In thousands) 1995 1994 1993
Service cost $ 3,756 $ 3,761 $ 3,326
Interest cost on
projected benefit
obligation 2,903 2,432 2,165
Return on plan assets (8,580) 564 (1,607)
Net amortization 5,533 (3,139) (142)
------- ------- -------
$ 3,612 $ 3,618 $ 3,742
------- ------- -------
The company provided for profit sharing and supplemental retirement
benefits of $3.6 million, $2.8 million, and $2.3 million for 1995, 1994, and
1993, 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 1996 would result in an expense
charge of approximately $3.3 million.
NOTE 10 ADVERTISING COSTS
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 1996, 1995,
and 1994, the domestic system agreed to increase national advertising spending
from 2% to 2.5% of net sales. During 1995, 1994, and 1993, the company
contributed $30.3 million, $29.0 million, and $27.7 million, respectively, to
WNAP. These contributions were recognized in company restaurant operating costs.
At December 31, 1995, and January 1, 1995, the company's payable to WNAP
amounted to $2.3 million and $2.2 million, respectively.
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Total advertising expense of the company amounted to $62.1 million, $58.2
million, and $56.8 million in 1995, 1994, and 1993, respectively.
NOTE 11 SEGMENT REPORTING
The company operates exclusively in the food-service industry. The
following presents information about the company by geographic area. There were
no material amounts of revenues or transfers among geographic areas.
UNITED
(In thousands) STATES INTERNATIONAL CORPORATE TOTAL
1995
Revenues $1,402,918 $343,362 $1,746,280
Income before
income taxes 240,765 48,921 (124,541) 165,145
Identifiable
assets (1) 972,126 169,844 26,679 1,168,649
1994
Revenues $1,307,551 $284,036 $1,591,587
Income before
income taxes 213,701 38,314 (101,722) 150,293
Identifiable
assets (1) 811,071 127,794 27,151 966,016
1993
Revenues $1,237,430 $244,955 $1,482,385
Income before
income taxes 184,273 29,624 (95,656) 118,241
Identifiable
assets (1) 747,318 108,362 27,605 883,285
(1) Excludes cash and cash equivalents, deferred income taxes, certain
other current assets, and investments.
NOTE 12 QUARTERLY FINANCIAL DATA (UNAUDITED)
The following selected quarterly financial data has been restated to
reflect the acquisition of Tim Hortons treated as a pooling of interests.
Quarter First Second Third Fourth
(In thousands) 1995 1994 1995 1994 1995 1994 1995 1994
Revenues $398,008 $358,764 $437,370 $414,195 $451,542 $409,724 $459,360 $408,904
Gross profit * 87,939 75,830 115,990 108,807 117,975 103,316 122,735 100,793
Net income 15,636 12,747 40,039 33,489 36,237 29,902 18,158 21,294
* Total revenues less cost of sales, company restaurant operating costs, and
operating costs.
- --------------------------------------------------------------------------------
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
26
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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
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION WITH COMPANY OFFICER SINCE
R. David Thomas 63 Senior Chairman of the Board and Founder, Director 1969
James W. Near 57 Chairman of the Board, Director 1986
Gordon F. Teter 52 President, Chief Executive Officer and
Chief Operating Officer, Director 1987
John K. Casey 63 Vice Chairman and Chief Financial Officer, Director 1981
Ronald E. Musick 55 Executive Vice President, Director 1986
Charles W. Rath 59 Executive Vice President 1987
George Condos 42 Executive Vice President 1982
John T. Schuessler 45 Executive Vice President 1983
John W. Wright 48 President - International Division 1993
Edward L. Austin 38 Senior Vice President 1990
Lawrence A. Laudick 48 Vice President, General Controller & 1976
Assistant Secretary
Lawrence E. Schauf 50 Senior Vice President, General Counsel & Secretary 1987
Stephen D. Farrar 45 Senior Vice President 1984
John F. Brownley 53 Senior Vice President and Treasurer 1981
Jack C. Whiting 46 Senior Vice President 1987
Robert G. Zoeller 51 Senior Vice President 1991
Joyce L. Eufemi 49 Senior Vice President 1993
Brion G. Grube 44 Senior Vice President 1990
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. Teter, Casey, Musick, Condos,
Schuessler, Wright, Schauf, Farrar, Whiting, Zoeller,
Austin, and Grube, and Ms. Eufemi 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. 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 was named President and Chief
Operating Officer in 1991. Mr. Teter assumed the title of
Chief Executive Officer in 1994.
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. Musick was Senior Vice President, Secretary and
Treasurer of Sisters International, Inc. from 1982 to 1987.
Mr. Musick became a Senior Vice President of the Company in
1986. He assumed his current position in 1991.
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Mr. Condos joined the Company in 1977. In 1987, he was promoted
from Vice President of Company Operations to Senior Vice
President of Company Operations. In 1988, he was promoted to
Senior Vice President of Wendy's Southwest Region. In 1992, he
was named Executive Vice President of Development.
Mr. Schuessler joined the Company in 1974. He served in Company
Operations as Regional Vice President from 1983 to 1984, Zone
Vice President from 1984 to 1986, and Division Vice President
from 1986 until 1987, when he was promoted to Senior Vice
President to the Northeast Region. In 1995, Mr. Schuessler was
promoted to Executive Vice President to U.S. Operations.
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. 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. He
became Regional Vice President in 1984. 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. Zoeller joined the Company in 1991 as Division Vice President
of the Eastern Division. Prior to joining Wendy's, he was a
Managing Partner for Tony Roma's, A Place for Ribs from 1989 to
1991. In 1995, Mr. Zoeller was promoted to Senior Vice President
to the Northeast 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.
Mr. Austin joined Wendy's in November 1976. Before being named
Senior Vice President of the Southeast Region in January 1996,
Mr. Austin had held the position of Division Vice President for
the New Orleans Division since January of 1994 and for the Los
Angeles Division since 1990.
Ms. Eufemi joined Wendy's in March of 1993. After holding the
position of Division Vice President for both the Colonial
Division and Chicago Division, she was named Senior Vice
President, Upper U.S. Region in May of 1995. Prior to joining
Wendy's, Ms. Eufemi was with Nutri/System, Inc. from 1989 to 1993
as Vice President/General Manager of the Western Region.
The information required by these Items, other than the
information set forth above, is omitted and incorporated herein
by reference from the Company's Definitive Proxy Statement dated
March 6, 1996. However, no information set forth in the
Definitive Proxy Statement regarding the Report of the
Compensation Committee on Executive Compensation (pages 10-16) or
the performance graph (pages 16-17) shall be deemed incorporated
by reference into this Form 10-K.
PART IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(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 December
31, 1995, January 1, 1995, and January 2, 1994.
Consolidated Balance Sheet - December 31, 1995, and
January 1, 1995.
Consolidated Statement of Cash Flows - Years ended
December 31, 1995, January 1, 1995, and January 2, 1994.
Consolidated Statement of Shareholders' Equity - Years
ended December 31, 1995, January 1, 1995, and January 2,
1994.
Notes to the Consolidated Financial Statements.
28
29
(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,
Schuessler, 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.
Agreement between the Company and Mr. Teter.
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) The Company filed a Form 8-K during the quarter ended
December 31, 1995. The Form 8-K filed December 4, 1995,
disclosed the Share Purchase Agreement entered into on
October 31, 1995 to acquire all of the outstanding shares of
632687 Alberta Ltd. for 16.45 million common shares of a
Canadian subsidiary of the Company exchangeable for 16.45
million common shares of the Company. Included were the
financial statements of 632687 Alberta Ltd. at December 31,
1994 and September 30, 1995, and pro forma consolidated
statements of income for the year ended January 1, 1995 and
for the year-to-date ended October 1, 1995, and a pro forma
consolidated balance sheet as of October 1, 1995.
(c) Exhibits filed with this report are attached hereto.
(d) The following Consolidated Financial Statement Schedule of
Wendy's International, Inc. and Subsidiaries is included in
Item 14(d):
II - Valuation and Qualifying Accounts
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.
29
30
- --------------------------------------------------------------------------------
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 3/29/96
------------------------------------------
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* 3/29/96 /s/ JAMES W. NEAR* 3/29/96
------------------------------------------- ---------------------------------------
R. David Thomas, Senior James W. Near, Chairman of the
Chairman of the Board and Board, Director
Founder, Director
/s/ JOHN K. CASEY 3/29/96 /s/ GORDON F. TETER* 3/29/96
------------------------------------------- ---------------------------------------
John K. Casey, Vice Chairman Gordon F. Teter, President,
and Chief Financial Officer, Chief Executive Officer and
Director Chief Operating Officer, Director
/s/ RONALD E. MUSICK* 3/29/96 /s/ LAWRENCE A. LAUDICK* 3/29/96
------------------------------------------- ---------------------------------------
Ronald E. Musick, Executive Vice Lawrence A. Laudick, Vice
President, Director President, General Controller
and Assistant Secretary
/s/ W. CLAY HAMNER* 3/29/96
------------------------------------------- ---------------------------------------
W. Clay Hamner, Director Ernest S. Hayeck, Director
/s/ JANET HILL* 3/21/96 /s/ THOMAS F. KELLER* 3/20/96
------------------------------------------- ---------------------------------------
Janet Hill, Director Thomas F. Keller, Director
/s/ FIELDEN B. NUTTER, SR.* 3/21/96 /s/ JAMES V. PICKETT* 3/21/96
------------------------------------------- ---------------------------------------
Fielden B. Nutter, Sr., Director James V. Pickett, Director
/s/ THEKLA R. SHACKELFORD* 3/29/96
------------------------------------------- ---------------------------------------
Frederick R. Reed, Director Thekla R. Shackelford, Director
*By /s/ JOHN K. CASEY 3/29/96
---------------------------------------
John K. Casey
Attorney-in-Fact
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31
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
TO THE SHAREHOLDERS OF
WENDY'S INTERNATIONAL, INC.
We have audited the consolidated financial statements and financial
statement schedule of Wendy's International, Inc. and Subsidiaries
listed in Item 14(a) of this Form 10-K. These financial statements
and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements and the financial statement schedule
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
December 31, 1995, and January 1, 1995, and the consolidated results
of their operations and their cash flows for the years ended
December 31, 1995, January 1, 1995, and January 2, 1994, in
conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule referred
to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
Columbus, Ohio COOPERS & LYBRAND L.L.P.
February 22, 1996
- --------------------------------------------------------------------------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statements of Wendy's International, Inc. and Subsidiaries on Form
S-3 (File Nos. 33-39525 and 33-57101), and Form S-8 (File Nos.
2-67253, 2-98696, 33-18177, 2-82823, 33-36602, 33-36603, and
33-57913) of our report dated February 22, 1996 on our audits of the
consolidated financial statements and financial statement schedule
of Wendy's International, Inc. and Subsidiaries as of December 31,
1995, and January 1, 1995, and for the years ended December 31,
1995, January 1, 1995, and January 2, 1994, which report is included
in this Annual Report on Form 10-K.
Columbus, Ohio COOPERS & LYBRAND L.L.P.
March 29, 1996
31
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WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (in thousands)
BALANCE AT CHARGED (CREDITED) BALANCE AT
BEGINNING TO COSTS & ADDITIONS END OF
CLASSIFICATION OF YEAR EXPENSES (DEDUCTIONS) (A) YEAR
Fiscal year ended December 31, 1995:
Reserve for royalty receivables $ 4,315 $ 48 $ (784) $ 3,579
Reserve for possible franchise-
related losses & contingencies 6,479 1,474 (722) 7,231
-------- -------- -------- --------
$ 10,794 $ 1,522 $ (1,506) $ 10,810
-------- -------- -------- --------
Fiscal year ended January 1, 1995:
Reserve for royalty receivables $ 5,273 $ (188) $ (770) $ 4,315
Reserve for possible franchise-
related losses & contingencies 5,005 1,961 (487) 6,479
-------- -------- -------- --------
$ 10,278 $ 1,773 $ (1,257) $ 10,794
-------- -------- -------- --------
Fiscal year ended January 2, 1994:
Reserve for royalty receivables $ 6,418 $ 881 $ (2,026) $ 5,273
Reserve for possible franchise-
related losses & contingencies 5,973 (1,581) 613 5,005
-------- -------- -------- --------
$ 12,391 $ (700) $ (1,413) $ 10,278
-------- -------- -------- --------
(a) Primarily represents reserves written off or reversed or transferred due to
the resolution of certain franchise situations.
Year-end balances are reflected in the Consolidated Balance Sheets as follows:
DECEMBER 31, JANUARY 1, JANUARY 2,
1995 1995 1994
---- ---- ----
Deducted from accounts receivable $ 7,363 $ 7,122 $ 7,190
Deducted from notes receivable 642 755 452
Deducted from other assets 2,516 2,273 1,881
Included in accrued expenses - other 289 644 755
------- ------- -------
$10,810 $10,794 $10,278
------- ------- -------
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WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION PAGE NO.
2(a) Share Purchase Agreement, dated as of Incorporated herein by reference from
October 31, 1995, by and among Wendy's Exhibit 2 of Form 10-Q for the quarter
International, Inc., 1149658 OntarioInc., ended October 1, 1995.
632687 Alberta Ltd. and Ronald V. Joyce
(b) Amendment to the Share Purchase Incorporated by reference to Exhibit 2.2
Agreement, dated as of December 28, to Ronald V. Joyce's Schedule 13D, dated
1995, by and among Wendy's January 5, 1996.
International, Inc., 1149658 Ontario Inc.,
1052106 Ontario Limited and Ronald V.
Joyce
(c) Share Exchange Agreement, dated as of Incorporated by reference to Exhibit 2.3
December 29, 1995, by and among to Ronald V. Joyce's Schedule 13D, dated
Wendy's International, Inc., an Ohio January 5, 1996.
corporation, 1149658 Ontario Inc., an
Ontario Corporation and a subsidiary
of Wendy's, and Ronald V. Joyce
(d) Provisions attaching to Exchangeable Incorporated by reference to Exhibit 2.4
Shares to Ronald V. Joyce's Schedule 13D, dated
January 5, 1996.
(e) Support Agreement, dated as of December Incorporated by reference to Exhibit 2.5
29, 1995, by and among Wendy's to Ronald V. Joyce's Schedule 13D, dated
International, Inc., 1149658 Ontario Inc., January 5, 1996.
and Ronald V. Joyce
(f) Irrevocable Trust Agreement for the Benefit of Incorporated by reference to Exhibit 2.6
Ronald V. Joyce, dated as of December to Ronald V. Joyce's Schedule 13D, dated
29, 1995, between Dana Klein and The January 5, 1996.
Huntington Trust Company, N.A.
(g) Subscription Agreement, dated as of Incorporated by reference to Exhibit 2.7
December 29, 1995, by and between to Ronald V. Joyce's Schedule 13D, dated
the Irrevocable Trust for the Benefit January 5, 1996.
of Ronald V. Joyce, an Ohio Trust, and
Wendy's International, Inc.
(h) Guaranty Agreement, dated as of Incorporated by reference to Exhibit 2.8
December 29, 1995, by and between The to Ronald V. Joyce's Schedule 13D, dated
Irrevocable Trust for the Benefit of Ronald January 5, 1996.
V. Joyce, an Ohio Trust, and Ronald V.
Joyce
(i) Escrow Agreement, dated as of December Incorporated by reference to Exhibit 2.9
29, 1995, by and among Wendy's to Ronald V. Joyce's Schedule 13D, dated
International, Inc., an Ohio corporation, January 5, 1996.
1149658 Ontario Inc., Ronald V. Joyce,
and The Trust Company of Bank of
Montreal, as escrow agent
(j) Registration Rights Agreement, dated as of Incorporated by reference to Exhibit 2.10
December 29, 1995, between Wendy's to Ronald V. Joyce's Schedule 13D,
International, Inc. and Ronald V. Joyce dated January 5, 1996.
3(a) Articles of Incorporation, as amended to Incorporated herein by reference from
date Exhibit 3(a) of Form 10-K for the year
ended January 3, 1993.
(b) New Regulations, as amended Incorporated herein by reference from
Exhibit 3(b) of Form 10-K for the year
ended January 3, 1993.
33
34
*4(a) Indenture between the Company and Incorporated herein by reference from
The Huntington National Bank pertaining Form S-3 Registration Statement, File No.
to 7% debentures and 6.35% notes due 33-57101.
December 15, 2025 and December 15, 2005,
respectively
(b) Indenture between the Company and Incorporated herein by reference from
The Huntington National Bank pertaining Form S-3 Registration Statement, File No.
to 7% convertible subordinated debentures 33-39525.
due 2006
(c) Preferred Stock Purchase Rights Agreement Incorporated herein by reference from
between the Company and Morgan Form 8-A Registration Statement, File
Shareholder Services Trust Company No. 1-8116.
(d) Amendment, dated as of December 29, Incorporated herein by reference from
1995, to the Rights Agreement, dated as Amendment No. 1 to Form 8-A/A
of August 10, 1988, between the Company Registration Statement, File No. 1-8116.
and American Stock Transfer and Trust
Company, as successor to Morgan
Shareholder Services Trust Company
10(a) Sample Key Executive Agreement between Incorporated herein by reference from
the Company and Messrs. Thomas and Exhibit 10(a) of Form 10-K for the year
Near. The Employment Term is ten years ended January 3, 1993.
for Mr. Thomas and five years for Mr. Near
(b) Sample New Key Executive Agreement Incorporated herein by reference from
between the Company and Messrs. Exhibit 10(b) of Form 10-K for the year
Brownley, Condos, Laudick, Ourant, ended January 3, 1993.
Rath, Schauf, Schuessler, Teter, and Wright
(c) Sample New Key Executive Agreement Incorporated herein by reference from
between the Company and Messrs. Casey Exhibit 10(c) of Form 10-K for the year
and Musick ended January 3, 1993.
(d) Sample Separation and Consulting Incorporated herein by reference from
Agreement between the Company and Exhibit 10(d) of Form 10-K for the year
Mr. Near ended January 3, 1993.
(e) Agreement between the Company Incorporated herein by reference from
and Mr. Teter Exhibit 10(e) of Form 10-K for the year
ended January 1, 1995.
(f) Employment Agreement between The 36-43
TDLGroup Ltd. (a subsidiary of the
Company) and Ronald Vaughn Joyce
(g) Senior Executive Earnings Incorporated herein by reference from the
Maximization Plan Company's Definitive Proxy Statement,
dated March 11, 1994.
(h) Description of Earnings Maximization Plan Incorporated herein by reference from
Exhibit 10(f) of Form 10-K for the year
ended January 3, 1993.
(i) Description of Management Incentive Plan 44
(j) Supplemental Executive Retirement Plan, 45-49
as amended
(k) 1978 Non-Qualified Stock Option Plan, Incorporated herein by reference from
as amended the Company's Definitive Proxy
Statement, dated March 11, 1994.
* 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.
34
35
(l) 1982 Stock Option Plan, as amended Incorporated herein by reference from
the Company's Definitive Proxy
Statement, dated March 11, 1994.
(m) 1984 Stock Option Plan, as amended Incorporated herein by reference from
the Company's Definitive Proxy
Statement, dated March 11, 1994.
(n) 1987 Stock Option Plan, as amended Incorporated herein by reference from
the Company's Definitive Proxy
Statement, dated March 11, 1994.
(o) 1990 Stock Option Plan, as amended Incorporated herein by reference from
the Company's Definitive Proxy
Statement, dated March 11, 1994.
(p) Wendy's WeShare Stock Option Plan, 50-53
as amended
11 Computation of Net Income Per Share 54
21 Subsidiaries of the Registrant 55
23 Consent of Coopers & Lybrand L.L.P. Incorporated by reference to page 31
of this Form 10-K.
24 Powers of Attorney 56-66
99 Safe harbor under the Private Securities 67-68
Litigation Reform Act of 1995
35