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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended December 28, 1997
( ) 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 __________
Commission File Number: 1-8116
WENDY'S INTERNATIONAL, INC.
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(Exact name of Registrant as specified in its charter)
Ohio 31-0785108
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
P.O. Box 256, 4288 West Dublin-Granville Road, Dublin, Ohio 43017-0256
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 614-764-3100
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
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Common Shares, $.10 stated value New York, Boston, Cincinnati, Midwest,
(132,233,000 shares outstanding Pacific, and Philadelphia
at March 2, 1998) Stock Exchanges
$2.50 Term Convertible Securities, New York Stock Exchange
Series A Preferred Stock New York Stock Exchange
Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO___ .
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. ________
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 2, 1998 was $2,305,497,000.
Documents incorporated by reference:
Portions of the Definitive Proxy Statement dated March 6, 1998 are
incorporated by reference into Part III. Exhibit index on pages 35-37.
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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 28, 1997, there were 5,207 Wendy's restaurants (Wendy's) in
operation in the United States and in 33 other countries and territories.
Of these restaurants, 1,202 were operated by the Company and 4,005 by the
Company's franchisees.
Additionally, at December 28, 1997, the Company and its franchisees
operated 1,578 Tim Hortons (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 pita sandwich, chili, baked and french fried potatoes, prepared salads,
desserts, soft drinks and other non-alcoholic beverages and children's
meals. In addition, the restaurants sell a variety of promotional products
on a limited basis.
Each Hortons unit offers coffee, cappucino, fresh baked goods such as
donuts, muffins, pies, croissants, tarts, cookies, cakes, bagels 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 28,
1997, the Bakery supplied 594 restaurants operated by the Company and 1,761
restaurants operated by franchisees. At the present time, the Bakery does
not manufacture or sell any other products.
See Note 13 under Item 8 on page 28 of this Form 10-K for information
regarding revenues, income before income taxes and total 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.
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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 has registered
certain trademarks and service marks 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 1998 to 2010, while international trademarks and
service marks have various durations of five 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 cash equivalents 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, effectiveness of marketing
and new product development by the Company and its competitors 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.
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 8 and 9 under Item 8 on pages 26 and 27 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, the Yemen
Arab Republic and the Municipality of Shanghai and the Provinces of Jiangsu
and Zhejiang, Peoples Republic of China.
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Franchised Wendy's Restaurants
As of December 28, 1997, the Company's franchisees operated 4,005 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 monthly net sales of the restaurant, usually
4%.
See Schedule II on page 34 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 15 and Note 10 under Item 8 on page 27 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 for a standard type of unit is 10
years plus one renewal period of 10 years less one day. The renewal is at
the option of the franchisee.
For franchisees who lease land and/or buildings from Hortons, the license
agreement generally requires between 3% and 6% of weekly gross sales for
royalties plus a monthly rental which is the greater of a base monthly
rental payment or a percentage (usually 10%) rental payment based on
monthly gross sales. For franchisees who do not lease land and/or buildings
from Hortons, the license agreement generally requires 4.5% to 7.5% of
weekly gross sales for royalties. Hortons generally retains the right to
reacquire 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 transfer to a new franchisee.
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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.
Since 1993, a systemwide vote has been taken on a proposal to increase
national advertising for the following calendar year. This voluntary
program reallocates the 4% required minimum advertising expenditures such
that 2.5% goes toward national advertising and 1.5% toward local and
regional advertising during 1999, 1998, 1997 and 1996. These minimum
requirements will revert back to 2% for national and 2% for local and
regional advertising unless a new systemwide vote in 1999 approves
reallocation for 2000.
In 1997, 1996 and 1995, approximately $109 million, $101 million and $105
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 Hortons advertising fund, known as the Tim Hortons
Advertising and Promotion Fund (Canada) Inc. (Ad Fund). During 1997, 1996
and 1995, approximately $30 million, $25 million and $21 million,
respectively, was spent by the Ad Fund.
Products sold by Wendy's international restaurants outside of Canada are
advertised through various media including television, radio, newspaper
and a variety of promotional campaigns. Most international franchisees are
required by their franchise agreement to spend at least 4% of the net
sales of their restaurants on advertising and marketing. The Company
assists its international franchisees in preparing and executing marketing
plans and endeavors to keep its international franchisees informed of
current advertising techniques and effective promotions. The Company has
established an advertising cooperative in the United Kingdom. Franchisees
and the Company's subsidiary, Wendy's Limited, are contributing 2.5% of
the net sales of their restaurants to the cooperative. The Company may
from time to time establish other regional advertising cooperatives.
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PERSONNEL
As of December 28, 1997, the Company employed approximately 47,000 people,
of whom approximately 44,000 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.
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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 2,910 square feet and has a food
preparation area, a dining room capacity for 94 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 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 5,200 square feet. This unit shares a common
dining room seating 104 persons. Each unit has separate food preparation
and storage areas and most have separate pick-up windows for each concept.
At December 28, 1997, the Company and its franchisees operated 5,207
Wendy's restaurants in the locations listed under Item 2 on page 7 of this
Form 10-K. In the fourth quarter of 1997, the Company identified 82
underperforming restaurants, of which 64 will be closed and an additional
18, which were written down, will be sold to franchisees (see Note 2 under
Item 8 on page 21 of this Form 10-K). Of the 1,202 company operated Wendy's
restaurants, the Company owned the land and building for 555 restaurants,
owned the building and held long-term land leases for 345 restaurants and
held leases covering land and building for 302 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. The Company also owned land and buildings for, or leased,
633 Wendy's restaurant locations which were leased or subleased to
franchisees. Surplus land and buildings are generally held for sale.
At December 28, 1997, there were 1,578 Hortons units, of which all but 124
were franchise operated. Of the 1,454 franchised units, 243 were owned by
Hortons and leased to franchisees, 803 were leased by Hortons and in turn
subleased to a franchisee, with the remainder either owned or leased
directly by the franchisee.
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 -- 91
Alaska -- 10
Arizona 48 21
Arkansas -- 46
California 19 176
Colorado 39 57
Connecticut -- 30
Delaware -- 18
Florida 141 197
Georgia 28 185
Idaho -- 19
Illinois 93 115
Indiana 1 144
Iowa -- 37
Kansas 15 45
Kentucky 2 97
Louisiana 40 39
Maine 2 9
Maryland -- 95
Massachusetts 43 18
Michigan 31 172
Minnesota 26 18
Mississippi 19 47
Missouri 18 62
Montana -- 15
Nebraska -- 31
Nevada -- 39
New Hampshire 1 17
New Jersey 10 93
New Mexico -- 24
New York 52 124
North Carolina 29 157
North Dakota -- 6
Ohio 113 278
Oklahoma -- 41
Oregon 17 36
Pennsylvania 72 140
Rhode Island -- 9
South Carolina -- 88
South Dakota -- 8
Tennessee -- 162
Texas 88 200
Utah 25 12
Vermont -- 3
Virginia 38 133
Washington 47 14
West Virginia 16 46
Wisconsin -- 59
Wyoming -- 12
District of Columbia -- 7
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1,073 3,502
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International Wendy's
Country/Territory Company Franchise
Argentina -- 12
Aruba -- 3
Bahamas -- 4
Canada 113 132
Cayman Islands -- 1
Dominican Republic -- 5
El Salvador -- 6
Greece -- 13
Guam -- 3
Guatemala -- 7
Hawaii 1 5
Honduras -- 9
Hong Kong -- 7
Hungary -- 2
Iceland -- 1
Indonesia -- 44
Italy -- 2
Japan -- 84
Kuwait -- 3
Mexico -- 4
New Zealand -- 10
Philippines -- 41
Puerto Rico -- 26
Saipan -- 1
Saudi Arabia -- 11
South Korea -- 20
Switzerland -- 4
Taiwan -- 18
Thailand -- 1
Turkey -- 9
United Arab Emirates -- 2
United Kingdom 15 4
Venezuela -- 7
Virgin Islands -- 2
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129 503
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Tim Hortons
Domestic Canada
Company Franchise Company Franchise
59 20 65 1,434
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ITEM 3. LEGAL PROCEEDINGS
On June 9, 1997, Arthur L. Wilson, individually and purportedly on behalf
of a putative class of other persons similarly situated, filed a complaint
against the Company in the U.S. District Court for the Southern District of
Mississippi. The complaint alleges that the Company has engaged in racial
discrimination in violation of Title VII and 42 U.S.C. Section 1981. The
plaintiff seeks judgment in an undetermined amount against the Company for
punitive and compensatory damages (including benefits) as well as
injunctive and equitable relief. Discovery is presently underway. The
Company intends to defend the action vigorously, and believes that it has
meritorious defenses to the claims sought to be asserted and that the
resolution of the action will not materially affect the Company's results
of operations, liquidity or financial condition. This case was last
referenced in the Company's Form 10-Q for the quarter ended June 29, 1997.
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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
1997 High Low Close
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First Quarter $23.375 $19.875 $20.625
Second Quarter 26.625 19.625 25.9375
Third Quarter 27.9375 21.000 21.250
Fourth Quarter 24.1875 19.8125 24.0625
1996 High Low Close
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First Quarter $22.500 $17.125 $18.125
Second Quarter 22.000 16.750 18.625
Third Quarter 22.250 16.750 21.500
Fourth Quarter 23.000 18.250 20.875
At March 2, 1998, the Company had approximately 93,000 shareholders of record.
DIVIDENDS DECLARED PER SHARE
Quarter 1997 1996
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First $.06 $.06
Second .06 .06
Third .06 .06
Fourth .06 .06
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ITEM 6. SELECTED FINANCIAL DATA
1997(1) 1996 1995(2) 1994(2) 1993(2)
OPERATIONS (In millions)
Retail sales $1,652 1,567 1,462 1,366 1,289
Revenues $2,037 1,897 1,746 1,592 1,482
Income before income taxes $ 219 255 165 150 118
Net income $ 130 156 110 97 81
FINANCIAL POSITION (In millions)
Total assets $1,942 1,781 1,509 1,215 1,100
Property and equipment, net $1,266 1,208 1,007 865 787
Long-term obligations $ 250 242 337 145 201
Company-obligated mandatorily
redeemable preferred securities $ 200 200
Shareholders' equity $1,184 1,057 819 702 624
OTHER DATA (In millions)
Systemwide sales Wendy's $5,226 4,784 4,495 4,227 3,924
Systemwide sales Hortons $ 772 646 541 440 377
Gross profit(3) $ 559 486 445 389 343
Capital expenditures $ 295 307 218 172 137
PER SHARE DATA
Net income basic $ .99 1.23 .93 .83 .70
Net income diluted $ .97 1.19 .88 .79 .67
Dividends $ .24 .24 .24 .24 .24
Market price at year end $22.88 20.88 21.25 14.38 17.38
(1) Includes charges of $72.7 million ($50.0 million after tax). (See Note 2
under Item 8 on page 21 of this Form 10-K.)
(2) Includes special pretax charges of $49.7 million, $28.9 million and $23.3
million for 1995, 1994 and 1993, respectively, primarily all related to
special profit sharing contributions made at Hortons.
(3) Total revenues less cost of sales, company restaurant operating costs and
operating costs.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1997 Overview
Wendy's International Inc. (the Company) concluded another successful year
in 1997, with average sales increases in both the Wendy's and Tim Hortons
(Hortons) concepts. In addition, the Wendy's domestic company operating
margin expanded to 14.8% in 1997 from 13.3% for 1996. Management remained
focused on long-term strategies to deliver continued success for the
Company and to enhance long-term shareholder value. Several strategic
actions were initiated to position the Company for continuing success.
These initiatives include:
- - In February 1998, the Board of Directors approved a plan to repurchase up
to $200 million in Wendy's common stock over the next 18 to 24 months.
Thereafter, the Company plans to make additional stock purchases to offset
the dilutive impact of the employee stock option grants.
- - The continuation of the successful program to buy and sell Wendy's
restaurants within the system, however, going forward the Company
anticipates the gains from franchising company operated restaurants to be
markedly lower than levels of the last three years. Gains in 1998 are
expected to be in the $10 million to $15 million range.
- - Several operations-related actions initiated in the fourth quarter of 1997
which included plans to close or franchise 82 underperforming company
operated restaurants, remove salad bars from the majority of Wendy's
company operated restaurants, provide for the disposition of surplus
property and develop a plan to accelerate new restaurant growth in 1999 and
beyond.
- - A decision made in the fourth quarter of 1997 to implement a new
enterprise-wide information technology system and a new store management
system to replace several different systems developed over the years. As
part of this plan, various assets were written down to reflect net
realizable values.
- - A decision, effective December 28, 1997, to change the accounting for
pre-opening costs for new restaurants to a policy of expensing these costs
as they are incurred. Existing deferred costs were written off. Previously,
the Company had followed a policy of amortizing pre-opening costs over the
first 12 months of new restaurant operations.
The impact of these initiatives was a non-recurring charge of $72.7 million
pretax ($50.0 million after tax), substantially all non-cash. These charges are
included in general and administrative expenses in the Consolidated Statement of
Income (see Note 2 to the consolidated financial statements and the "general and
administrative expenses" discussion below). The Company reported basic earnings
per share (EPS) of $.99 for the year, and diluted EPS of $.97. Without the
impact of the initiatives mentioned above, basic EPS was $1.37 and diluted EPS
was $1.33. This represents a 12% increase, before non-recurring charges, in
diluted EPS compared with $1.19 in 1996 and $.88 in 1995. Net income in 1997,
before the initiatives, increased 16% to $181 million compared with $156 million
in 1996 and $110 million in 1995.
RETAIL SALES
Retail sales includes sales from company operated Wendy's and Hortons
restaurants, bakery sales to Wendy's franchisees and warehouse sales of dry
goods and supplies to Hortons' franchisees. Retail sales increased 5.4% to $1.7
billion in 1997 from $1.6 billion in 1996 which compared with a 7.2% increase
over 1995. The largest component of retail sales was generated from Wendy's
domestic company operated restaurants which increased 5.9% in average unit net
sales in 1997, compared with 3.4% in 1996. The average number of Wendy's company
operated domestic restaurants decreased 46 in 1997, increased 15 in 1996, and
increased 37 in 1995. The bakery and warehouse sales increased 23.2% in 1997 and
9.3% in 1996, reflecting increases in the number and average sales of Wendy's
and Hortons' franchised restaurants serviced. International company operated
Wendy's are primarily concentrated in Canada, where average unit sales increased
7.7% in local currency.
The following chart reflects average net sales per domestic Wendy's
restaurants for the last three years:
1997 1996 1995
Company $1,111,000 $1,049,000 $1,014,000
Franchise $1,017,000 $ 978,000 $ 974,000
Total domestic $1,042,000 $ 998,000 $ 986,000
The improvement in average Wendy's domestic restaurant sales reflects the
continued emphasis on quality plus everyday value, effective marketing
campaigns, the addition of Fresh Stuffed Pitas to the permanent menu and the
focus on restaurant operations.
The average number of transactions in domestic company operated Wendy's
increased approximately 2.8% in 1997 compared with 1.1% in 1996 and .4% in 1995.
Domestic selling prices increased 1.4% during the year, while 1996 and 1995
increased .7% and .2%, respectively. This is consistent with the Company's
continued emphasis on its everyday value strategy in the extremely intense
competitive environment.
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11
FRANCHISE REVENUES
Included in franchise revenues are royalty income from franchisees, rental
income from properties leased to franchisees, gains from franchising Wendy's
company restaurants and franchise fees. Franchise fees include charges for
various costs and expenses of the Company related to establishing a franchisee's
business, and include initial equipment packages for the Hortons franchises.
Reserves against collection of these franchise revenues are also provided.
Management reviews reserves on an ongoing basis and believes there are adequate
levels for franchise-related receivables. Adjustments to reserves established in
prior years are reflected in general and administrative expenses.
Royalties, before reserves, increased $19.6 million or 12.9% in 1997, and $11.6
million or 8.3% in 1996. An average of 239 more franchise domestic Wendy's
restaurants were open in 1997 compared with an average of 177 more in 1996.
Hortons' royalties increased 17.6% in 1997 and 17.7% in 1996, reflecting the
increase in the number of franchise restaurants open in addition to positive
same-store sales growth in local currency of approximately 8% in 1997 and 5% in
1996.
Pretax gains from franchising Wendy's restaurants amounted to $80.5 million in
1997 for 228 restaurants, compared with $63.2 million in 1996 for 179
restaurants and $37.8 million for 120 restaurants in 1995. Additionally, pretax
gains resulting from the sale of properties which were previously leased to
franchisees by Wendy's amounted to $475,000 in 1997, $3.4 million in 1996 and
$3.8 million in 1995. Franchise fees were $36.2 million in 1997, $35.1 million
in 1996 and $40.6 million in 1995.
Rental income from restaurants leased to franchisees increased $20.7 million in
1997 compared with an increase of $12.7 million in 1996, reflecting an
additional number of restaurants being leased to franchisees. At the end of
1997, 1,679 restaurants were leased to franchisees, versus 1,366 in 1996 and
1,219 in 1995. Of these, Hortons leased 1,046 to franchisees in 1997, 904 in
1996 and 815 in 1995.
COST OF SALES AND RESTAURANT OPERATING COSTS
Wendy's cost of sales for all domestic restaurants decreased to 59.1% of Wendy's
domestic retail sales in 1997 from 60.1% in 1996 and 58.7% in 1995. Domestic
food costs, as a percent of domestic retail sales, were 28.9% in 1997, 30.0% in
1996 and 29.1% in 1995. The reduction in food costs reflected a reduction in
french fry costs, the favorable impact of new products such as Fresh Stuffed
Pitas and the benefit of a 1.4% increase in selling prices. The increase in 1996
reflected unfavorable delivered prices primarily for chicken and bacon in
addition to the popularity of chicken products during 1996 resulting in a higher
proportion of retail sales from chicken.
Wendy's domestic labor costs were 26.3% of domestic retail sales in 1997,
compared with 26.0% in 1996 and 25.6% in 1995. The increase reflects higher
restaurant labor costs due to pressure on wage rates. This continues to be
driven by demand throughout the industry for labor to provide quality service to
customers. In 1997 and 1996, labor rates were also impacted by minimum wage
increases. The Company continues to control labor costs by adherence to its
labor guidelines. Sales per labor hour increased to $26.66 in 1997 reflecting a
3.3% increase in productivity following a 1.7% increase in 1996.
Wendy's domestic company restaurant operating costs remained constant in
1997, and increased $20.1 million in 1996 and $12.6 million in 1995. Wendy's
domestic restaurant operating costs as a percent of domestic retail sales were
26.1% in 1997, 26.6% in 1996 and 26.2% in 1995. The reduced percentage in 1997
reflected lower marketing expenditures and the leveraging benefit of higher
average sales. Rent, salaries and benefits, maintenance and expenditures related
to food safety were higher in 1996 compared with 1995.
The Wendy's domestic company operating margin was 14.8% for 1997, compared with
13.3% in 1996 and 15.1% in 1995. The improvement in 1997 reflects favorable food
cost and restaurant operating costs as discussed above. The following chart
details the margin.
1997 1996 1995
% OF SALES % OF SALES % OF SALES
Retail sales 100.0% 100.0% 100.0%
Cost of sales 59.1 60.1 58.7
Company restaurant operating costs 26.1 26.6 26.2
- ----------------------------------------------------------------------------
Domestic company operating margin 14.8% 13.3% 15.1%
- -----------------------------------------------------------------------------
Cost of sales for the Wendy's bakery and Hortons' warehouse operations increased
$33.8 million in 1997 and $12.3 million in 1996, reflecting additional sales to
franchisees due to the increased number of restaurants serviced and higher
average sales per restaurant.
Operating Costs
Operating costs include rent expense related to properties subleased 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
ensure a successful Hortons franchise opening, 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.
11
12
Rent expense increased $5.8 million in 1997 and $4.6 million in 1996 reflecting
the growth in the number of properties being leased and then subleased to
franchisees. In 1996, the higher rent expense was offset by lower cost of
equipment and related expenses reflecting fewer new store openings by Hortons
Canadian franchisees during 1996. There were 955 total restaurants leased by the
Company and then subleased to franchisees in 1997 versus 815 in 1996 and 692 in
1995.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $233.0 million in 1997 compared with
$136.5 million in 1996 and $136.4 million in 1995. The increase in 1997 reflects
several non-recurring charges in the fourth quarter in connection with the
strategic initiatives outlined above (see Note 2 to the consolidated financial
statements). These charges totaled $72.7 million pretax ($50.0 million after
tax) and were substantially non-cash. The Company identified 82 underperforming
Wendy's restaurants of which 64 will be closed and 18 will be franchised. Of the
closures, 56 restaurants are domestic, seven are in Canada and one restaurant is
in the United Kingdom. The plan also includes charges for the disposition of
surplus property. A charge of $35.0 million was recorded for this initiative.
Also in the fourth quarter 1997, a decision was made to implement a new
enterprise-wide information technology system and a new store management system.
A charge of $15.7 million was recognized for the write down to net realizable
value of existing information systems.
The Company changed the accounting treatment for pre-opening costs at year-end
1997 to begin expensing such costs as they are incurred. Previously, the Company
was deferring pre-opening costs to be amortized over the first 12 months of the
new restaurant's operations. The write off of the balance of pre-opening costs
was $6.0 million. A decision was made to remove salad bars from most company
operated Wendy's restaurants and assets were written down $7.1 million to
reflect this. The balance of $8.9 million included reserve provisions for
various legal and international contingencies and other asset write downs.
Excluding the non-recurring charges, general and administrative expenses
increased $23.8 million in 1997. This primarily reflected increases in salaries
and benefits and other investments to expand Wendy's and Hortons in existing
markets, introduce the Hortons concept to the United States, and further develop
Wendy's outside North America. Reserves originally provided for Hortons'
environmental issues were reduced $2.9 million in 1997 and $6.6 million in 1996.
General and administrative expenses in 1996 were approximately equal to 1995
with normal increases in annual merit-based compensation in 1996 offset by
adjustments to environmental reserves for Hortons and by a 1995 expense for a
Hortons benefit plan which ended that year.
SPECIAL CHARGES
Special charges for 1995 included the profit sharing contributions which
occurred while Hortons was a private company, professional fees incurred to
effectuate the Hortons transaction, reserves for contingencies, and costs
related to organizing Canadian operations to blend the Wendy's and Hortons
concepts. The Hortons transaction was accounted for as a pooling of interests in
1995.
INTEREST
Net interest expense decreased in 1997 primarily as a result of
higher interest income of $25.3 million compared with $16.2 million in 1996 and
$10.2 million in 1995. Interest income increased in 1997, 1996 and 1995
primarily as a result of an increase in notes receivable taken for restaurant
dispositions. Interest expense was $28.9 million in 1997, $23.0 million in 1996
which includes distributions on the company-obligated mandatorily redeemable
preferred securities and $20.5 million in 1995.
Interest expense was reduced in 1995 due to debt retirements but increased in
1997 and 1996 reflecting additional borrowings in December 1995 and September
1996.
INCOME TAXES
The effective income tax rate for 1997 was 40.5% compared with 38.8% for 1996
and 33.3% for 1995. The increase in 1997 resulted from certain non-deductible
foreign losses which did not result in tax benefits and somewhat higher state
taxes. The increase in 1997 and 1996 also reflects the income generated by
Hortons in Canada, which has a higher tax rate than domestic 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
The Company maintains a strong balance sheet to support system growth. Total
assets were approximately two-and-one half times liabilities and the
debt-to-equity ratio was 21% at year-end 1997 compared with 23% in 1996 and 41%
in 1995 (company-obligated mandatorily redeemable preferred securities are
excluded from the debt-to-equity ratio). Standard & Poors and Moody's have given
the Company debt ratings of BBB+ and Baa-1, respectively.
Total assets increased $160.2 million or 9.0% over 1996 primarily due to an
increase in notes receivable and additions to property and equipment for
restaurant development. Notes receivable were $192.6 million at year-end 1997,
an increase of $62.6 million over 1996 which was primarily due to restaurant
dispositions. Total cash and cash equivalents amounted to $234.3 million at
year-end 1997 compared with $219.0 million at year-end 1996. Return on average
assets was 13.4% in 1997, or 17.2% excluding the non-recurring charges of $72.7
million, compared with 17.6% in 1996.
12
13
Common shareholders' equity increased 12.1% in 1997. On a per share basis,
equity increased to $8.95 per share in 1997 from $8.16 per share in 1996. The
Company's return on average equity was 11.5% in 1997, or 15.7% excluding the
non-recurring charges, compared with 16.6% in 1996. In 1996, the Company raised
$200 million by issuing company-obligated mandatorily redeemable preferred
securities. These securities have characteristics of both traditional debt and
traditional preferred securities, and are classified between long-term
liabilities and common shareholders' equity on the Company's balance sheet.
Reserve balances related to royalty receivables and other franchise-related
receivables, which are primarily recorded in accounts and notes receivables,
were $7.8 million and $8.7 million at December 28, 1997 and December 29, 1996,
respectively.
CASH FLOW
Cash provided by operating activities increased 17.6% to $223.4 million in 1997,
compared with $189.9 million in 1996 and $164.9 million in 1995. In all three
years, cash provided by operating activities was primarily used for capital
expenditures, dividend payments, debt repayment and acquisitions of franchised
restaurants.
Cash proceeds of $68.0 million were realized in 1997 from the sale of Wendy's
company operated restaurants to franchisees, while $67.1 million was provided in
1996 and $39.0 million was provided in 1995. Over the last three years, the
Company used $112.1 million to acquire Wendy's franchised restaurants and $50.8
million to purchase competitors' concepts to be converted to Wendy's or Hortons.
The Company issued $200 million in company-obligated mandatorily redeemable
preferred securities in 1996 and $200 million of long-term debt in 1995. The
Company also repaid $204.5 million in long-term obligations during the last
three years.
During 1997, capital expenditures amounted to $294.6 million. New restaurant
expenditures amounted to $197.4 million; $47.3 million was spent for
improvements to existing restaurants; and $49.9 million was spent for other
additions. These included Hortons' expenditures of $34.9 million for new
restaurant development, which are leased to franchisees. Current plans are to
open about 375 new Wendy's restaurants, of which approximately 100 will be
company operated Wendy's sites, and 200 new Hortons in 1998. Capital
expenditures are expected to be approximately $285 million in 1998 including
approximately $87 million for Hortons. The Board of Directors approved a plan to
repurchase up to $200 million in Wendy's common stock over the next 18 to 24
months. Thereafter, the Company plans to make additional stock purchases to
offset the dilutive impact of employee stock option grants. Cash flow from
operations, cash and investments on hand, possible asset sales, and cash
available through existing revolving credit agreements and through the possible
issuance of securities should provide for the Company's projected cash
requirements through 1998, including cash for capital expenditures, future
acquisitions of restaurants from franchisees, stock repurchases or for other
corporate purposes.
TIM HORTONS
Hortons is the second largest quick-service restaurant chain in Canada and at
year-end 1997 had 1,578 restaurants open. The Company believes there are
significant opportunities to expand the Hortons concept throughout Canada and
the United States. In 1997, 213 new Hortons were opened, including 57 in the
United States. The concept is extremely flexible and includes standard units
with a bakery, both with and without drive-through windows, double-drive
through buildings, and various other satellites, kiosks and carts. In addition,
combination units shared with Wendy's are utilized. Future expansion in Canada
is anticipated to be primarily through franchising and the Company plans to
open about 160 Canadian Hortons in 1998. Hortons will also continue development
in the United States, and plans to open 40 stores in 1998.
Hortons is primarily a franchise operation in Canada and financial success
depends on developing new stores and increasing average unit sales. This
results in royalties, rental income and revenue from warehouse sales. The
average unit same-store sales increased approximately 8% in local currency
during 1997. As a result of this, and new development, royalties increased 18%,
rental income increased 18% and warehouse sales increased 25% over 1996. In
total, Canadian systemwide Hortons sales advanced 19% during the year.
INTERNATIONAL WENDY'S
Canada is the Company's largest international market and makes up the majority
of company operated international restaurants. Canadian Wendy's average
restaurant sales for company operated restaurants increased 7.7% in local
currency in 1997, following a 1.4% increase in 1996. In 1997, 19 Wendy's opened
in Canada, bringing total restaurants to 245 at year end. Included in these
restaurants are combination units featuring Wendy's and Hortons which have
proven successful with 46 units open at the end of 1997. In 1998, the Company
plans to open 25 Wendy's restaurants in Canada.
At year-end 1997, there were 387 international Wendy's open outside Canada, with
86 restaurants opened in 1997. International growth outside Canada continues to
be primarily through franchising, but real estate joint ventures and company
operated units are also planned. The Company plans on opening 75 new Wendy's in
international markets outside North America in 1998 and intends to increase
international development in future years.
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.
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MANAGEMENT'S OUTLOOK
Management is committed to increasing shareholder value over time. The
initiatives implemented to dispose of underperforming restaurants, write down
underperforming assets, establish appropriate reserve levels and, accelerate
restaurant development, are all consistent with management's long-term focus.
Likewise, management believes the new enterprise-wide information systems and a
new store management system will position the Company for future information
technology challenges. Management believes the common share repurchase program
is in the best interest of the Company and shareholders.
The Company intends to adhere to its long established strategies of exceeding
customer expectations, fostering a performance-driven culture, delivering a
balanced message of brand equity plus value in advertising and creating a
healthy restaurant system. The Company believes that its success depends on
providing quality products and everyday value, not in discounting products. Menu
variety is also an important part of customer satisfaction. Restaurants are
remodeled on a recurring basis to maintain a fresh image and increase
convenience for consumers. When combined with effective marketing, the goal of
these initiatives is to increase the number of transactions and average sales
per restaurant.
New restaurant development continues to be very important. Both Wendy's and
Hortons restaurant concepts are underpenetrated in domestic and international
markets. The Company intends to grow aggressively, but responsibly, focusing on
the markets with the best potential for sales and return on investment. Each new
company owned unit must meet minimum operational and financial requirements
before being approved for development. A total of 584 new restaurants were added
in 1997. Current plans call for approximately 575 new units to open in 1998. Of
these, approximately 375 are planned as Wendy's restaurants and 200 are planned
to be Hortons. While the majority of units will continue to be traditional
sites, special sites, such as shopping malls and universities, will contribute
to this growth. The Company plans to accelerate the new unit development growth
rate beginning in 1999 and expects to open about 675 new units in 1999. During
1998 resources will be allocated to manage the increased development.
The Company will continue its strategy to enhance the overall health of the
Wendy's system by acquiring restaurants from, and selling restaurants to,
franchisees where prudent. The Company does not expect the gains generated from
selling company restaurants to be as significant to overall earnings as in
recent years. Gains in the past three years were $81 million in 1997, $67
million in 1996 and $42 million in 1995. In 1998, these gains are expected to be
in the $10 million to $15 million range.
The strength and vitality of the franchise community is an essential part of
the continued success of the Company. Various strategies have been developed to
assist individual franchisees and the overall franchise system. The goal of
these strategies is to encourage responsible new restaurant development, add
new franchisees, enhance minority representation, increase royalty income, and
maintain a high royalty receivable collection rate. The Company will continue
to maintain appropriate reserves against franchise receivables.
The Company is optimistic about development of Hortons in the United States,
but the concept does not yet enjoy the superior brand recognition it has in
Canada. The entire domestic quick-service industry is competitive and there are
many established baked goods outlets. The Company plans to build consumer
awareness and traffic for Hortons.
The Company remains optimistic about long-term opportunities for international
operations. Most of Wendy's development outside North America is with
franchisees who are affected by economic conditions, such as those recently
experienced in Southeast Asia. Europe and the Middle East also remain very
challenging. Likewise, although the Canadian economy remains strong, the
Canadian dollar has weakened in recent months and Wendy's company operations and
Hortons franchise operations were impacted. The Company does not believe these
conditions change the long-term potential of the international business, but
they could influence short-term results.
Year 2000
The Company has completed an assessment of year 2000 compliance. The year 2000
issue concerns the ability of date sensitive software to properly recognize the
year 2000 in calculating and processing computer system information. The Company
has initiated a plan to install a new enterprise-wide information system and a
new store management system, which will include new software that is year 2000
compliant. The Company has made an assessment that some existing software will
need to be modified since it will not be replaced by the new information
systems. The modification is expected to cost $3 million to $4 million, of which
$1 million has been expensed in 1997, and the remainder will be expensed over
the next two years. The new information systems are estimated to cost
approximately $70 million to $80 million, a substantial portion of which will be
capitalized. The Company anticipates timely completion of these projects which
should mitigate the year 2000 issue. However, if the new information systems are
not implemented on a timely basis and if modifications to existing systems can
not be accomplished on a timely basis, there would be adverse financial and
operational effects on the Company. The amount of these effects can not be
ascertained at this time.
Recently Issued Accounting Standards
Financial Accounting Standards Number 130 - "Reporting Comprehensive Income" was
issued in June 1997. This statement requires the reporting of comprehensive
income and its components in a full set of general-purpose financial statements.
Additionally in June 1997, Financial Accounting Standards Number 131 -
"Disclosures about Segments of an Enterprise and Related Information" was
issued. This statement provides information about operating segments in annual
financial statements and requires selected information about operating segments
in interim financial reports. It also requires certain related disclosures about
products and services, geographic areas and major customers. These statements
are effective for years beginning after December 15, 1997. The Company is in the
process of evaluating the impact of these statements.
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Safe Harbor Statement
Certain information contained in this annual report, particularly information
regarding future economic performance and finances, plans and objectives of
management, is forward looking. In some cases, information regarding certain
important factors that could cause actual results to differ materially from any
such forward-looking statement appear together with such statement. In addition,
the following factors, in addition to other possible factors not listed, could
affect the Company's actual results and cause such results to differ materially
from those expressed in forward-looking statements. These factors include
competition within the quick-service restaurant industry, which remains
extremely intense, both domestically and internationally, with many competitors
pursuing heavy price discounting; changes in economic conditions; consumer
perceptions of food safety; harsh weather, particularly in the first and fourth
quarters; changes in consumer tastes; labor and benefit costs; legal claims;
risk inherent to international development (including currency fluctuations);
the continued ability of the Company and its franchisees to obtain suitable
locations and financing for new restaurant development; governmental initiatives
such as minimum wage rates, taxes and possible franchise legislation; and other
factors set forth in Exhibit 99 to the Company's Form 10-K filed with the
Securities and Exchange Commission.
Wendy's Domestic and International Restaurants
- -----------------------------------------------------------------------------------------------------
Wendy's
Total Wendy's Company Operated Wendy's Franchised
- -----------------------------------------------------------------------------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
Open at beginning of year 4,933 4,667 4,411 1,315 1,311 1,264 3,618 3,356 3,147
Opened 371 343 333 97 89 98 274 254 235
Closed (97) (77) (77) (15) (10) (14) (82) (67) (63)
Acquisitions within the system 261 283 203 33 104 83 228 179 120
Dispositions within the system (261) (283) (203) (228) (179) (120) (33) (104) (83)
- -----------------------------------------------------------------------------------------------------
Open at end of year 5,207 4,933 4,667 1,202 1,315 1,311 4,005 3,618 3,356
- -----------------------------------------------------------------------------------------------------
15
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Years ended December 28, 1997, December 29, 1996 and December 31, 1995
- ----------------------------------------------------------------------------------------------------
(In thousands, except per share data) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
REVENUES
Retail sales $ 1,651,689 $ 1,566,888 $ 1,461,880
Franchise revenues 385,641 330,256 284,400
- ---------------------------------------------------------------------------------------------------
2,037,330 1,897,144 1,746,280
- ---------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales 1,026,026 976,666 890,363
Company restaurant operating costs 389,534 379,404 351,062
Operating costs 63,175 54,710 60,216
General and administrative expenses (Note 2) 232,983 136,461 136,424
Depreciation and amortization of property
and equipment 95,638 88,957 80,573
Other (income) expense 6,899 (683) 2,595
Special charges 49,672
Interest, net 3,604 6,812 10,230
- ---------------------------------------------------------------------------------------------------
1,817,859 1,642,327 1,581,135
- ---------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 219,471 254,817 165,145
INCOME TAXES 88,972 98,869 55,075
- ---------------------------------------------------------------------------------------------------
Net income $ 130,499 $ 155,948 $ 110,070
- ---------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE $ .99 $ 1.23 $ .93
- ---------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $ .97 $ 1.19 $ .88
- ---------------------------------------------------------------------------------------------------
DIVIDENDS PER COMMON SHARE $ .24 $ .24 $ .24
- ---------------------------------------------------------------------------------------------------
BASIC SHARES 131,595 126,461 118,934
- ---------------------------------------------------------------------------------------------------
DILUTED SHARES 140,738 133,684 130,164
- ---------------------------------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements
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17
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 28, 1997 and December 29, 1996
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996
=======================================================================================================================
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 234,262 $ 218,956
Accounts receivable, net 66,755 53,250
Notes receivable, net 13,897 11,003
Deferred income taxes 31,007 15,760
Inventories and other 35,633 37,994
- -----------------------------------------------------------------------------------------------------------------------
381,554 336,963
- -----------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, NET 1,265,500 1,207,944
NOTES RECEIVABLE, NET 178,681 118,994
GOODWILL, NET 51,346 51,636
DEFERRED INCOME TAXES 15,117 12,938
OTHER ASSETS 49,482 52,959
- -----------------------------------------------------------------------------------------------------------------------
$ 1,941,680 $ 1,781,434
=======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 107,157 $ 108,629
Accrued expenses
Salaries and wages 31,377 24,741
Taxes 21,615 18,502
Insurance 30,899 30,337
Other 14,415 18,874
Current portion of long-term obligations 7,151 6,681
- -----------------------------------------------------------------------------------------------------------------------
212,614 207,764
- -----------------------------------------------------------------------------------------------------------------------
LONG-TERM OBLIGATIONS
TERM DEBT 205,872 197,622
Capital leases 43,891 44,206
- -----------------------------------------------------------------------------------------------------------------------
249,763 241,828
- -----------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES 81,017 62,956
OTHER LONG-TERM LIABILITIES 14,052 12,114
COMMITMENTS AND CONTINGENCIES
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY WENDY'S FINANCING I,
HOLDING SOLELY WENDY'S CONVERTIBLE DEBENTURES 200,000 200,000
SHAREHOLDERS' EQUITY
Preferred stock, authorized: 250,000 shares
Common stock, $.10 stated value per share, authorized: 200,000,000 shares
Issued: 115,946,000 and 113,148,000 shares, respectively 11,595 11,315
Capital in excess of stated value 353,327 312,570
Retained earnings 839,215 740,311
Translation adjustments and other (18,191) (5,712)
- -----------------------------------------------------------------------------------------------------------------------
1,185,946 1,058,484
Treasury stock, at cost: 129,000 shares (1,712) (1,712)
- -----------------------------------------------------------------------------------------------------------------------
1,184,234 1,056,772
- -----------------------------------------------------------------------------------------------------------------------
$ 1,941,680 $ 1,781,434
=======================================================================================================================
See accompanying Notes to the Consolidated Financial Statements
17
18
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 28, 1997, December 29, 1996 and December 31, 1995
- -------------------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
=========================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 130,499 $ 155,948 $ 110,070
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 104,529 94,981 84,452
Deferred income taxes 802 23,394 (4,393)
Gain from restaurant dispositions, net (80,460) (63,190) (37,810)
Loss (gain) on other asset dispositions, net 60,416 (124) 760
Net reserves for receivables and other contingencies 352 (8,855) 15,424
Changes in operating assets and liabilities net of effects
of acquisitions and dispositions of restaurants
Accounts and notes receivable (21,101) (3,443) (11,091)
Inventories and other (1,476) (6,476) (1,245)
Accounts payable and accrued expenses 6,391 (6,956) 7,370
Decrease (increase) in other assets 12,048 (571) (3,243)
Other changes, net 11,402 5,220 4,603
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 223,402 189,928 164,897
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from restaurant dispositions 68,017 67,140 38,994
Proceeds from other asset dispositions 25,876 30,951 19,139
Capital expenditures (294,552) (307,284) (217,532)
Acquisition of franchises (10,226) (59,119) (42,746)
Principal payments of notes receivable 17,265 11,576 1,418
Other investing activities (7,359) (5,253) 12,990
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (200,979) (261,989) (187,737)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of trust preferred securities 200,000
Proceeds from issuance of term debt 285,410
Proceeds from issuance of common stock 30,567 12,192 20,653
Principal payments on long-term obligations (6,089) (29,434) (169,017)
Dividends paid on common stock (31,595) (30,436) (24,565)
Payments on amounts due officer, net (63,221) (5,057)
Other financing activities (4,211) 1,904
- -------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (7,117) 84,890 109,328
- -------------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 15,306 12,829 86,488
- -------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 218,956 206,127 119,639
- -------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 234,262 $ 218,956 $ 206,127
=========================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- -------------------------------------------------------------------------------------------------------------------------
Interest paid $ 29,186 $ 30,556 $ 19,939
- -------------------------------------------------------------------------------------------------------------------------
Income taxes paid 79,941 71,840 53,364
- -------------------------------------------------------------------------------------------------------------------------
Debt converted to common stock 98,714 84
- -------------------------------------------------------------------------------------------------------------------------
Capital lease obligations incurred 6,811 6,156 7,717
- -------------------------------------------------------------------------------------------------------------------------
Notes receivable from restaurant dispositions 70,839 53,231 39,070
- -------------------------------------------------------------------------------------------------------------------------
Acquisition of franchises
- -------------------------------------------------------------------------------------------------------------------------
Fair value of assets acquired 19,106 64,803 67,291
- -------------------------------------------------------------------------------------------------------------------------
Cash paid 10,226 59,119 42,746
- -------------------------------------------------------------------------------------------------------------------------
Liabilities assumed 8,880 5,684 24,850
- -------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements
18
19
WENDY'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended December 28, 1997, December 29, 1996 and December 31, 1995
- ------------------------------------------------------------------------------------------------------------
(In thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
COMMON STOCK AT STATED VALUE
- ------------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 11,315 $ 10,399 $ 10,179
Exercise of options 280 103 220
Conversion of subordinated debentures 813
- ------------------------------------------------------------------------------------------------------------
Balance at end of period 11,595 11,315 10,399
- ------------------------------------------------------------------------------------------------------------
CAPITAL IN EXCESS OF STATED VALUE
Balance at beginning of period 312,570 199,804 171,888
Exercise of options, including tax benefits 40,757 14,865 27,832
Conversion of subordinated debentures -- 97,901 84
- ------------------------------------------------------------------------------------------------------------
Balance at end of period 353,327 312,570 199,804
- ------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of period 740,311 614,799 529,294
Net income 130,499 155,948 110,070
Dividends paid (31,595) (30,436) (24,565)
- ------------------------------------------------------------------------------------------------------------
Balance at end of period 839,215 740,311 614,799
- ------------------------------------------------------------------------------------------------------------
TRANSLATION ADJUSTMENTS AND OTHER (18,191) (5,712) (4,511)
- ------------------------------------------------------------------------------------------------------------
TREASURY STOCK, AT COST (1,712) (1,712) (1,712)
- ------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY $ 1,184,234 $ 1,056,772 $ 818,779
============================================================================================================
COMMON SHARES
Balance issued at beginning of period 113,148 103,993 101,787
Exercise of options 2,798 1,031 2,200
Conversion of subordinated debentures -- 8,124 6
- ------------------------------------------------------------------------------------------------------------
Balance issued at end of period 115,946 113,148 103,993
- ------------------------------------------------------------------------------------------------------------
TREASURY SHARES (129) (129) (129)
- ------------------------------------------------------------------------------------------------------------
COMMON SHARES ISSUED AND OUTSTANDING 115,817 113,019 103,864
- ------------------------------------------------------------------------------------------------------------
COMMON SHARES ISSUABLE UPON
CONVERSION OF EXCHANGEABLE SHARES 16,450 16,450 16,450
- ------------------------------------------------------------------------------------------------------------
COMMON SHARES ISSUED AND OUTSTANDING,
INCLUDING EXCHANGEABLE SHARES 132,267 129,469 120,314
============================================================================================================
See accompanying Notes to the Consolidated Financial Statements
19
20
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 and franchising of
quick-service restaurants serving high-quality food. At year-end 1997, the
Company and its franchise owners operated 5,207 restaurants under the name
"Wendy's" in 50 states and in 33 other countries and territories. Additionally,
the Company and its franchise owners operated 1,499 restaurants under the name
"Tim Hortons" in Canada and 79 units 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 intercompany accounts and transactions have been
eliminated in consolidation.
Certain reclassifications have been made for prior years to conform with the
1997 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. The most significant of these estimates are related to reserves for
receivables, workers' compensation claims, income taxes, useful lives of
long-lived assets and contingencies. 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.
In 1995, special charges included the profit sharing contribution made to
the sole shareholder of Hortons (prior to acquisition) of $29.6 million, and
legal, accounting, and other professional fees of $4.0 million to effectuate the
Hortons transaction. Also, reserves of $13.5 million for environmental issues
and contigencies, and miscellaneous costs to organize Canadian operations to
blend the Wendy's and Hortons concepts were included.
INVENTORIES
Inventories, amounting to $19.3 million and $17.0 million at December 28,
1997 and December 29, 1996, 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 using the straight-line method
in amounts adequate to amortize costs over the following estimated useful lives:
buildings, up to 40 years; leasehold improvements, up to 25 years; restaurant
equipment, up to 15 years; other equipment, up to 10 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 generally expensed as incurred.
Property and equipment, at cost, at each year end consisted of the
following:
- -----------------------------------------------------
In thousands) 1997 1996
- -----------------------------------------------------
Land $ 335,258 $ 319,284
Buildings 601,616 532,682
Leasehold improvements 313,229 333,239
Restaurant equipment 394,702 420,288
Other equipment 84,039 70,141
Capital leases 74,566 74,268
- -----------------------------------------------------
1,803,410 1,749,902
- -----------------------------------------------------
Accumulated depreciation
and amortization (537,910) (541,958)
- -----------------------------------------------------
$ 1,265,500 $ 1,207,944
=====================================================
GOODWILL
Goodwill is amortized using the straight-line method over periods ranging
from 10 to 40 years which, for leased restaurants, includes the original lease
period plus renewal options, if applicable. The Company periodically reviews
goodwill and, based upon undiscounted cash flows, recognizes impairments when a
permanent decline in value has occurred. Accumulated amortization of goodwill
was $21.7 million and $19.2 million at December 28, 1997 and December 29, 1996,
respectively.
NOTES RECEIVABLE
The carrying amount of notes receivable approximates fair value.
PRE-OPENING COSTS
Effective December 28, 1997, the Company recorded a special pretax charge of
approximately $6.0 million to reflect the decision to write off all existing
pre-opening costs and to thereafter expense such costs as incurred. The Company
did not separately state this change ($2.5 million pretax) as a cumulative
effect of a change in accounting principle due to the immaterial effect of the
change. Previously, the Company capitalized certain operating costs incurred
prior to the opening of a new restaurant and amortized such costs over a
one-year period (see Note 2).
20
21
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company capitalizes internally developed software costs which are
amortized over a seven-year period. At December 28, 1997 and December 29, 1996,
capitalized software development costs, net of accumulated amortization amounted
to $1.0 million and $6.6 million, respectively (see Note 2).
ADVERTISING COSTS
The Company expenses 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 of franchise royalties and other franchise-related receivables
and commitments (see Note 10).
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. These
franchise expenses are included in general and administrative expenses.
FOREIGN OPERATIONS
At December 28, 1997, the Company and its franchise owners operated 245
Wendy's restaurants and 1,499 Tim Hortons restaurants in Canada. Additionally,
387 Wendy's restaurants were operated by the Company and its franchise owners in
other foreign countries and territories. Assets and liabilities are translated
at the year-end exchange rates and revenues and expenses are translated at
average exchange rates for the period. Resulting translation adjustments are
recorded as a component of shareholders' equity. The functional currency of each
foreign subsidiary is the respective local currency.
NET INCOME PER SHARE
During 1997, the Company adopted Financial Accounting Standards Number 128-
"Earnings per Share". All prior year earnings per share amounts have been
restated.
Basic earnings per common share is computed by dividing net income available
to common shareholders by the weighted average number of common shares
outstanding during each period. Diluted computations include dilutive common
share equivalents and company-obligated mandatorily redeemable preferred
securities, when dilutive, and the elimination of related expenses, net of
income taxes.
The computation of basic and diluted earnings per common share for each year
end is shown below:
- ----------------------------------------------------------------
(In thousands
except per share amounts) 1997 1996 1995
================================================================
Income for computation of
basic earnings per share $130,499 $155,948 $110,070
Interest savings on
assumed conversions 6,034 2,759 4,727
- ----------------------------------------------------------------
Income for computation of
diluted earnings per share $136,533 $158,707 $114,797
- ----------------------------------------------------------------
Weighted average shares
for computation of basic
earnings per share 131,595 126,461 118,934
- ----------------------------------------------------------------
Incremental shares on
assumed issuance and
repurchase of stock
options 1,570 2,749 3,107
Assumed conversions 7,573 4,474 8,123
- ----------------------------------------------------------------
Weighted average shares
for computation of
diluted earnings per share 140,738 133,684 130,164
- ----------------------------------------------------------------
Basic earnings per share $ .99 $ 1.23 $ .93
- ----------------------------------------------------------------
Diluted earnings per share $ .97 $ 1.19 $ .88
================================================================
NOTE 2 NON-RECURRING CHARGES
In the fourth quarter of 1997, the Company initiated several strategic
actions that resulted in pretax charges of $72.7 million, which are included in
general and administrative expenses in the Consolidated Statement of Income. The
charges were primarily to establish the proper value of nonproducing or
underperforming assets. The Company identified 82 underperforming Wendy's
restaurants of which 64 will be closed and 18 will be franchised. This plan also
includes a provision for disposition of surplus property. A charge of $35.0
million was provided to write down the assets to disposal value. Also in the
fourth quarter, a decision was made to implement a new enterprise-wide
information technology system and a new store management system. A charge of
$15.7 million was recognized to write down the existing information system to
net realizable value. A decision to remove salad bars from most company operated
Wendy's restaurants resulted in an asset write down of $7.1 million. All of the
aforementioned assets are to be disposed of by December 31, 1998.
The Company changed the accounting treatment for pre-opening costs at
year-end 1997 to begin expensing such costs as they are incurred. Previously,
the Company deferred pre-opening costs to be amortized over the first 12 months
of the new restaurant's operations. The write-off of the balance of pre-opening
costs was $6.0 million. The remaining $8.9 million includes provisions for
various legal and international contingencies and other asset write downs.
21
22
NOTE 3 TERM DEBT
Term debt at each year end consisted of the following:
- -------------------------------------------------------------
(In thousands) 1997 1996
=============================================================
Notes, unsecured, and
Mortgages Payable with a
weighted average interest
rate of 8.1%, due in
installments through 2010 $ 13,518 $ 5,023
6.35% Notes, due December 15, 2005 96,815 96,524
7% Debentures, due December 15, 2025 96,502 96,464
- -------------------------------------------------------------
206,835 198,011
Current portion (963) (389)
- -------------------------------------------------------------
$ 205,872 $ 197,622
=============================================================
The 6.35% notes and 7% debentures are unsecured and unsubordinated. They are
not redeemable by the Company prior to maturity.
In 1995, the Company entered into interest rate swaps to manage its exposure
to interest rate fluctuations on the 6.35% and 7% securities issued in 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, realized 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 future cash flows for all term debt, the fair value was
approximately $214 million at December 28, 1997 and $191 million at December
29, 1996.
The combined aggregate amounts of future maturities for all term debt are as
follows:
- ---------------------------
(In thousands)
===========================
1998 $ 963
1999 981
2000 1,017
2001 935
2002 1,017
Later years 201,922
- ---------------------------
$206,835
===========================
The Company has unused contractual lines of credit aggregating $200 million
from various financial institutions, generally at their respective prime rates.
Net interest expense for each year consisted of the following:
- ---------------------------------------------------------------
(In thousands) 1997 1996 1995
===============================================================
Total interest charges $ 18,936 $ 20,257 $ 20,456
Distributions on trust
preferred securities 9,973 2,772
Interest income (25,305) (16,217) (10,226)
- ---------------------------------------------------------------
$ 3,604 $ 6,812 $ 10,230
===============================================================
NOTE 4 COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
In 1996, Wendy's Financing I (the trust) issued $200,000,000 of $2.50 Term
Convertible Securities, Series A (the trust preferred securities). Wendy's
Financing I, a statutory business trust, is a wholly-owned consolidated
subsidiary of the Company with its sole asset being $202 million aggregate
principal amount of 5% Convertible Subordinated Debentures due September 15,
2026, of Wendy's (the trust debenture).
The trust preferred securities are non-voting (except in limited
circumstances), pay quarterly distributions at an annual rate of 5%, carry a
liquidation value of $50 per share and are convertible into the Company's common
shares at any time prior to the close of business on September 15, 2026, at the
option of the holder. The trust preferred securities are convertible into common
shares at the rate of 1.8932 common shares for each trust preferred security
(equivalent to a conversion price of $26.41 per common share). The Company has
executed a guarantee with regard to the trust preferred securities. The
guarantee, when taken together with the Company's obligations under the trust
debenture, the indenture pursuant to which the trust debenture was issued, and
the applicable trust document, provides a full and unconditional guarantee of
the trust's obligations under the trust preferred securities.
Based on the quoted market price, fair value of the trust preferred
securities was approximately $215 million at December 28, 1997 and $208 million
at December 29, 1996.
NOTE 5 LEASES
The Company occupies land and buildings and uses equipment under terms of
numerous lease agreements expiring on various dates through 2086. 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.
22
23
At each year end capital leases consisted of the following:
- ---------------------------------------------------
(In thousands) 1997 1996
===================================================
Buildings $ 74,566 $ 74,268
Accumulated amortization (34,967) (35,188)
- ---------------------------------------------------
$ 39,599 $ 39,080
===================================================
At December 28, 1997, 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
=====================================================
1998 $ 10,014 $ 49,868
1999 8,567 46,210
2000 7,007 42,134
2001 6,223 38,369
2002 5,882 35,682
Later years 49,451 222,939
- -----------------------------------------------------
Total minimum lease payments 87,144 $435,202
- -----------------------------------------------------
Amount representing interest (37,065)
- -----------------------------------------------------
Present value of net minimum
lease payments 50,079
Current portion (6,188)
- ----------------------------------------
$43,891
========================================
Total minimum lease payments have not been reduced by minimum sublease
rentals of $3.6 million under capital leases, and $229.3 million under operating
leases due in the future under noncancelable subleases.
Rent expense for each year is included in company restaurant operating costs
and amounted to:
- ----------------------------------------------------
(In thousands) 1997 1996 1995
====================================================
Minimum rents $56,512 $50,806 $45,142
Contingent rents 13,737 12,817 9,709
- ----------------------------------------------------
$70,249 $63,623 $54,851
====================================================
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 10 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, included in other
assets, consisted of the following:
- ----------------------------------------------------------
(In thousands) 1997 1996
Total minimum lease receipts $ 24,708 $ 33,531
Estimated residual value 3,308 4,615
Amount representing
unearned interest (12,497) (17,727)
Current portion, included
in accounts receivable (888) (931)
- ----------------------------------------------------------
$ 14,631 $ 19,488
==========================================================
At each year end assets leased under operating leases consisted of the
following:
- -----------------------------------------------------
(In thousands) 1997 1996
=====================================================
Land $ 136,288 $ 116,181
Building 314,155 234,870
Equipment 43,468 27,626
- -----------------------------------------------------
493,911 378,677
Accumulated amortization (102,995) (73,308)
- -----------------------------------------------------
$ 390,916 $305,369
=====================================================
5
24
At December 28, 1997, future minimum lease receipts were as follows:
- -------------------------------------
Financing Operating
(In thousands) Leases Leases
=====================================
1998 $ 2,456 $ 38,982
1999 2,288 37,332
2000 2,226 35,942
2001 2,058 33,761
2002 1,952 29,869
Later years 13,728 115,318
- -------------------------------------
$ 24,708 $291,204
=====================================
Rental income for each year is included in franchise revenues and amounted
to:
- -------------------------------------------------------
(In thousands) 1997 1996 1995
=======================================================
Minimum rents $39,643 $35,267 $28,612
Contingent rents 55,968 39,622 33,542
- -------------------------------------------------------
$95,611 $74,889 $62,154
=======================================================
NOTE 6 INCOME TAXES
The provision for income taxes at each year end consisted of the following:
- --------------------------------------------------------
(In thousands) 1997 1996 1995
========================================================
Current
Federal $ 54,114 $ 50,658 $ 51,641
State and local 7,254 4,290 3,864
Foreign 26,802 20,527 3,963
- --------------------------------------------------------
88,170 75,475 59,468
- --------------------------------------------------------
Deferred
Federal (3,421) 14,235 7,724
State and local 265 1,258 (476)
Foreign 3,958 7,901 (11,641)
- --------------------------------------------------------
802 23,394 (4,393)
- --------------------------------------------------------
$ 88,972 $ 98,869 $ 55,075
========================================================
The temporary differences which give rise to deferred tax assets and
liabilities at each year end consisted of the following:
- ---------------------------------------------------
(In thousands) 1997 1996
===================================================
Deferred tax assets
Lease transactions $ 4,012 $ 4,049
Reserves not currently
deductible 30,523 13,597
Foreign operations 11,842 12,464
All other 5,230 2,696
- ---------------------------------------------------
51,607 32,806
- ---------------------------------------------------
Valuation allowance (4,734) (2,585)
- ---------------------------------------------------
$ 46,873 $ 30,221
===================================================
Deferred tax liabilities
Lease transactions $ 5,854 $ 7,615
Property and equipment
basis differences 35,582 34,886
Installment sales 33,334 18,215
All other 6,996 3,763
- ---------------------------------------------------
$ 81,766 $ 64,479
===================================================
Deferred tax assets for foreign operations have been established primarily
for net operating loss carryovers and excess capital allowances. In 1996 and
1997, the deferred tax assets related to non-Canadian foreign operations are
offset by a valuation allowance.
24
25
A reconciliation of the statutory U.S. Federal income tax rate of 35 percent
to the company's effective tax rate for each year is shown below:
- ---------------------------------------------------------------
(In thousands) 1997 1996 1995
===============================================================
Income taxes at
statutory rate $ 76,815 $ 89,186 $ 57,801
Effect of foreign
operations 8,891 6,090 (2,993)
State and local taxes,
net of federal benefit 4,888 3,606 2,209
Canadian restructuring
benefit (3,936)
Other (1,622) (13) 1,994
- ---------------------------------------------------------------
Income taxes at
effective rate $ 88,972 $ 98,869 $ 55,075
================================================================
NOTE 7 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 compensation committee 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, except in the earnings per share
computations, until they are exercised. Pro forma disclosures are provided as if
the Company adopted the cost recognition requirements under Financial Accounting
Standards Number 123 (SFAS 123) - "Accounting for Stock-Based Compensation."
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 10 percent of each eligible employee's earnings, with a minimum
of 20 options to be made to each eligible employee annually. An aggregate of 5.4
million common shares of the Company have been reserved pursuant to the WeShare
Plan.
The options have a term of 10 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 July 30, 1997, August 1, 1996 and August 3,
1995, approximately 572,000 options, 896,000 options and 785,000 options were
granted to eligible employees at an exercise price of $27.13 per share, $17.38
per share and $18.31 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,
February 23, 1994 and February 20, 1997. An aggregate of 18.5 million common
shares of the Company have been reserved for issuance to key employees and
outside directors under the 1990 Plan, as amended.
On July 30, 1997, August 1, 1996 and August 3, 1995, approximately 1.6
million options, 1.4 million options and 1.3 million options were granted under
the 1990 Plan at an exercise price of $27.13 per share, $17.38 per share and
$18.31 per share, respectively.
The following is a summary of stock option activity for the last three
years:
- --------------------------------------------------------
Shares Under Weighted Average
(Shares in thousands) Option Price Per Share
========================================================
Balance at January 1, 1995 9,654 $ 11.52
Granted 2,262 18.28
Exercised (2,200) 9.39
Canceled (414) 14.78
- --------------------------------------------------------
Balance at December 31,1995 9,302 13.52
Granted 2,994 17.77
Exercised (1,031) 11.82
Canceled (518) 16.16
- --------------------------------------------------------
Balance at December 29 ,1996 10,747 14.74
Granted 2,239 26.78
Exercised (2,798) 10.92
Canceled (485) 18.04
- --------------------------------------------------------
Balance at December 28 ,1997 9,703 $ 18.46
========================================================
Options exercisable to purchase common shares totaled 4.4 million, 5.1
million and 4.2 million at December 28, 1997, December 29, 1996 and December 31,
1995, respectively. Shares reserved under the plans at each year end were 15.4
million in 1997, 12.0 million in 1996 and 12.5 million in 1995.
The fair value of each option granted during 1997 is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions: (1) dividend yield of 1.1%, (2) expected volatility of 28%, (3)
risk-free interest rate of 5.8% and (4) expected life of four years.
The weighted average fair value of options granted during 1997, 1996 and
1995 was $7.73, $4.70 and $4.49, respectively.
25
26
The following tables summarize stock options outstanding and exercisable at
December 28, 1997:
(Shares in thousands) Options Outstanding
======================================================================
Weighted
Average Weighted
Range of Remaining Average
Exercise Options Contractual Exercise
Prices Outstanding Life Price
======================================================================
$ 5-$15 2,927 5.3 $ 12.97
15- 17 2,201 8.5 17.35
17- 19 2,273 7.5 18.36
19- 28 2,302 9.5 26.60
- ----------------------------------------------------------------------
$ 5-$28 9,703 7.5 $ 18.46
======================================================================
- ----------------------------------------------------
(Shares in thousands) Options Exercisable
====================================================
Weighted
Range of Average
Exercise Options Exercise
Prices Exercisable Price
====================================================
$ 5-$15 2,626 $ 12.70
15-17 595 17.30
17-19 1,090 18.31
19-28 43 21.00
- ----------------------------------------------------
$ 5-$28 4,354 $ 14.81
====================================================
Had compensation expense been recognized for stock-based compensation plans
in accordance with provisions of SFAS 123, the Company would have recorded net
income and earnings per share as follows:
- --------------------------------------------------------------------------
(In millions, except per share data) 1997 1996 1995
- --------------------------------------------------------------------------
Net income $ 126.3 $ 153.5 $ 109.4
Basic earnings per common share $ .96 $ 1.21 $ .92
Diluted earnings per common share $ .94 $ 1.17 $ .88
==========================================================================
The impact of applying SFAS 123 in this pro forma disclosure is not
indicative of future amounts. SFAS 123 does not apply to grants prior to 1995,
and additional grants in future years are anticipated.
The Company has a Shareholder Rights Plan (Rights Plan) under which one
preferred stock purchase right (Right) was distributed 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 $100 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 10 days after a
tender offer for 15 percent or more of the common shares is announced. No
certificates will be issued unless the Rights Plan is activated.
Under certain circumstances, all Rights holders, except the person or
company holding 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, 2008.
NOTE 8 ACQUISITIONS
During 1997, the Company acquired 25 Wendy's restaurants in the Salt Lake
City market for cash and notes totaling $18.7 million. Eight other restaurants
were also acquired in 1997.
Additionally, the Company acquired 31 Rax restaurants in Ohio, West Virginia
and Kentucky for $9.1 million. These sites were converted to Wendy's and Tim
Hortons restaurants.
During 1996, the Company acquired 41 Wendy's restaurants in the New York
market for cash of $20.6 million and 52 Wendy's restaurants primarily in the
South Carolina market for cash of $27.5 million. Eleven other restaurants were
acquired for $11.0 million during 1996.
In addition, the Company acquired 40 Roy Rogers restaurants in the New York
area for $17.7 million and 44 Hardee's restaurants in the Detroit market for
$24.0 million. These sites were converted to Wendy's and Tim Hortons
restaurants.
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 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. The exchangeable shares may be exchanged at any time
until December 29, 2005, at which time they must be exchanged. Tim Hortons is
the leading franchisor of bakery and coffee shops in Canada. The transaction was
accounted for as a pooling of interests. In connection with the acquisition,
$4.0 million in professional fees to effectuate the transaction were incurred.
Additionally during 1995, the Company acquired 33 Wendy's 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.
26
27
NOTE 9 DISPOSITIONS
The Company franchised 228, 179 and 120 Wendy's restaurants during 1997,
1996 and 1995, respectively. These transactions resulted in pretax gains of
approximately $80.5 million, $63.2 million and $37.8 million in 1997, 1996 and
1995, respectively, and are included in franchise revenues.
Notes receivable related to dispositions were $166.7 million at December 28,
1997 and $103.4 million at December 29, 1996.
NOTE 10 COMMITMENTS AND CONTINGENCIES
At December 28, 1997 and December 29, 1996, the Company's reserves
established for doubtful royalty receivables were $2.0 million in both years.
Reserves related to possible losses on notes receivable, real estate,
guarantees, claims and contingencies involving franchisees totaled $5.8 million
at December 28, 1997 and $6.7 million at December 29, 1996. These reserves are
included in accounts receivable, notes receivable and other accrued expenses.
The Company has guaranteed certain leases and debt payments of franchise
owners with average annual obligations of $9.2 million over four 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.
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 the Company's self-insurance or other insurance programs. It is the opinion
of the Company that the ultimate resolution of such matters will not materially
affect the Company's financial condition or earnings.
The Company continues to complete environmental assessments of properties
where appropriate. The amount of obligation to be incurred is uncertain, however
the Company believes such obligations to be immaterial to the financial position
and results of operations of the Company.
The Company has completed an assessment of year 2000 compliance. The year
2000 issue concerns the ability of date sensitive software to properly recognize
the year 2000 in calculating and processing computer system information. The
Company has initiated a plan to install a new enterprise-wide information system
and a new store management system, which will include new software that is year
2000 compliant. The Company has made an assessment that some existing software
will need to be modified since it will not be replaced by the new information
systems. The modification is expected to cost $3 million to $4 million, of which
$1 million has been expensed in 1997, and the remainder will be expensed over
the next two years. The new information systems are estimated to cost
approximately $70 million to $80 million, a substantial portion of which will be
capitalized. The Company anticipates timely completion of these projects which
should mitigate the year 2000 issue. However, if the new information systems are
not implemented on a timely basis and if modifications to existing systems can
not be accomplished on a timely basis, there would be adverse financial and
operational effects on the Company. The amount of these effects can not be
ascertained at this time.
NOTE 11 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. 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.
The funded status of the pension plans for each year end consisted of the
following:
- -------------------------------------------------------------------------------
(In thousands) 1997 1996
===============================================================================
Accumulated benefit obligation:
Vested $(43,839) $(38,120)
Nonvested $ (4,467) $ (4,394)
Projected benefit obligation $(51,360) $(45,197)
Fair value of plan assets 53,659 48,705
Unrecognized net loss 2,959 355
Unrecognized prior service costs 76 3,466
Minimum pension adjustment (739)
- -------------------------------------------------------------------------------
Prepaid pension cost $ 4,595 $ 7,329
===============================================================================
In determining the present value of benefit obligations, discount rates of
6.75% and 7.25% were used in 1997 and 1996, respectively. The expected long-term
rate of return on assets used was 8.5% in 1997 and 1996. The assumed rate of
increase in compensation levels was 8.0% for 1997 and 1996. Plan assets as of
December 28, 1997 consisted of debt and equity instruments and cash equivalents.
27
28
Net periodic pension cost for each year consisted of the following:
- -------------------------------------------------------------------------
(In thousands) 1997 1996 1995
=========================================================================
Service cost $ 4,583 $ 4,478 $ 3,756
Interest cost on
projected benefit
obligation 3,575 3,105 2,903
Return on plan assets (7,743) (5,161) (8,580)
Net amortization 4,902 1,930 5,533
- -------------------------------------------------------------------------
$ 5,317 $ 4,352 $ 3,612
=========================================================================
The Company provided for profit sharing and supplemental retirement
benefits of $4.4 million, $4.3 million and $3.6 million for 1997, 1996 and 1995,
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 had an agreement with the former Chairman of the Board which,
as a result of his death in 1996, required the Company to expense $1.3 million
under this agreement in 1996.
NOTE 12 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. WNAP is not a consolidated
subsidiary of the Company. 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. Since 1993, the domestic
system has agreed to increase national advertising spending from 2% to 2.5% of
net sales. During 1997, 1996 and 1995, the Company contributed $32.4 million,
$31.8 million and $30.3 million, respectively, to WNAP. These contributions were
recognized in company restaurant operating costs. At December 28, 1997 and
December 29, 1996, the Company's payable to WNAP amounted to $2.3 million and
$2.5 million, respectively.
The advertising program utilized by Hortons, known as the Ad Fund, is
similar in operation to WNAP. Hortons' franchisees and company operated units
are required to contribute 4% of gross sales to the Ad Fund.
Total advertising expense of the Company, including amounts contributed to
WNAP, the Ad Fund, local advertising costs and other marketing and advertising
expenses, amounted to $60.9 million, $62.2 million and $62.1 million in 1997,
1996 and 1995, respectively.
NOTE 13 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.
- -----------------------------------------------------------------------------------
(In thousands) United States International Corporate Total
===================================================================================
1997
Revenues $ 1,593,409 $ 443,921 $2,037,330
Income before
income taxes 232,708 66,677 $ (79,914) 219,471(1)
Total assets 1,617,867 287,114 36,699 1,941,680
===================================================================================
1996
Revenues $ 1,514,819 $ 382,325 $1,897,144
Income before
income taxes 255,791 64,804 $ (65,778) 254,817
Total assets 1,482,094 270,328 29,012 1,781,434
===================================================================================
1995
Revenues $ 1,402,918 $ 343,362 $1,746,280
Income before
income taxes 240,765 48,921 $ (124,541) 165,145
Total assets 1,215,810 266,672 26,679 1,509,161
===================================================================================
(1) Includes charges of $72.7 million ($50.0 million after tax), see Note 2.
NOTE 14 SUBSEQUENT EVENT
On February 4, 1998, the Company's Board of Directors approved a program
for the repurchase of up to $200 million of the Company's outstanding common
shares over the next 18 to 24 months. Thereafter, the company plans to purchase
shares each year in an amount to offset the dilutive effect of employee stock
option grants.
28
29
NOTE 15 QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter First Second Third Fourth
(In thousands, except per share data) 1997 1996 1997 1996 1997 1996 1997(1) 1996
====================================================================================================================================
Revenues $ 458,884 $ 409,883 $ 540,215 $ 491,911 $ 525,501 $ 506,575 $ 512,730 $488,775
Gross profit(2) 107,884 87,964 159,818 135,937 146,788 132,204 144,105 130,259
Net income (loss) 24,637 19,454 56,996 49,304 52,968 46,941 (4,102) 40,249
Basic earnings per common share(3) .19 .16 .43 .39 .40 .36 (.03) .31
Diluted earnings per common share(3) .19 .16 .42 .38 .39 .36 (.03) .30
====================================================================================================================================
(1) Includes charges of $72.7 million ($50.0 million after tax), see Note 2.
(2) Total revenues less cost of sales, company restaurant operating costs, and
operating costs.
(3) Amounts have been restated, see Note 1.
- --------------------------------------------------------------------------------
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
29
30
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 65 Senior Chairman of the Board and Founder, Director 1969
Gordon F. Teter 54 Chairman of the Board, Chief Executive Officer and
President, Director 1987
Frederick R. Reed 49 Chief Financial Officer, General Counsel and Secretary, 1996
Director
John T. Schuessler 47 President and Chief Operating Officer U.S. Operations 1983
George Condos 44 Executive Vice President 1982
Ronald E. Musick 57 Executive Vice President, Director 1986
Charles W. Rath 61 Executive Vice President 1987
Edward L. Austin 40 Senior Vice President 1990
John F. Brownley 55 Senior Vice President and Treasurer 1981
Joyce L. Eufemi 51 Senior Vice President 1993
Stephen D. Farrar 47 Senior Vice President 1984
Brion G. Grube 46 Senior Vice President 1990
Lawrence A. Laudick 50 Senior Vice President, General Controller and 1976
Assistant Secretary
Jack C. Whiting 48 Senior Vice President 1987
Robert G. Zoeller 53 Senior Vice President 1991
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, Reed, Schuessler, Austin, Ms. Eufemi, Mr.
Grube, Mr. Laudick and Mr. Zoeller, each of the above individuals has held the
same principal occupation with the Company for at least the last five years.
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. He became Chairman of the
Board in 1997.
Mr. Reed joined the Company in 1996 as Executive Vice President, General Counsel
and Secretary. Prior to that he was a senior partner with Vorys, Sater, Seymour
and Pease LLP. Mr. Reed has been a member of the Company's Board of Directors
since his election in 1995. Mr. Reed was named Chief Financial Officer in 1997.
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 of the Northeast Region. In 1995, Mr. Schuessler was
promoted to Executive Vice President to U.S. Operations. He was named President
and Chief Operating Officer U.S. Operations in 1997.
Mr. Austin joined the Company in November 1976. Before being named Senior Vice
President of the Southeast Region in 1996, Mr. Austin had held the position of
Division Vice President for the New Orleans Division since 1994 and for the Los
Angeles Division since 1990.
Ms. Eufemi joined the Company in 1993. After holding the position of Division
Vice President for both the Colonial Division and Chicago Division, she was
named Senior Vice President of the Upper U.S. Region in 1995. Prior to joining
the Company, Ms. Eufemi was with Nutri/System, Inc. from 1989 to 1993 as Vice
President/General Manager of the Western Region.
Mr. Grube joined the Company in 1990 as Division Vice President and was promoted
to Senior Vice President - Canada in 1993. Before joining the Company, he was
with Imperial Savings Association from 1988 to 1990. Prior to that time, Mr.
Grube spent 12 years with Pizza Hut, Inc.
30
31
Mr. Laudick joined the Company in 1976 as Assistant Controller. He was named
Controller in 1977, General Controller in 1981, Vice President and General
Controller in 1983 and Senior Vice President and General Controller in 1997. Mr.
Laudick has also been named Assistant Secretary since 1976.
Mr. Zoeller joined the Company in 1991 as Division Vice President of the Eastern
Division. Prior to joining the Company, 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 of the Northeast 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, 1998. However, no information set
forth in the Definitive Proxy Statement regarding the Report of the Compensation
Committee on Executive Compensation (pages 11-14) or the performance graph (page
14) 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 28, 1997,
December 29, 1996 and December 31, 1995.
Consolidated Balance Sheet - December 28, 1997 and December 29, 1996.
Consolidated Statement of Cash Flows - Years ended December 28, 1997,
December 29, 1996 and December 31, 1995.
Consolidated Statement of Shareholders' Equity - Years ended December
28, 1997, December 29, 1996 and December 31, 1995.
Notes to the Consolidated Financial Statements.
(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 Mr. Thomas.
Sample New Key Executive Agreement between the Company and Messrs.
Brownley, Condos, Laudick, Rath, Reed, Schuessler, Teter, Mrs. Chesnut
and Mrs. McGinnis.
Sample New Key Executive Agreement between the Company and Messrs.
Casey and Musick.
Agreement between the Company and Mr. Teter.
Employment Agreement between The TDL Group Ltd. (a subsidiary of the
Company) and Ronald Vaughn Joyce.
Amendment to Employment Agreement between The TDL Group Ltd. and Ronald
Vaughn Joyce.
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.
(b) The Company filed a Form 8-K on February 5, 1998 announcing (under Item 5)
summary financial results for the fourth quarter and full 1997 fiscal year,
certain strategic initiatives and approval of a program to repurchase up to
$200 million of the Company's outstanding common shares. A copy of the
press release issued February 4, 1998 was attached.
(c) Exhibits filed with this report are listed in the Index to Exhibits.
(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.
31
32
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/ FREDERICK R. REED 3/23/98
-------------------------------------
Frederick R. Reed
Chief Financial Officer,
General Counsel and Secretary
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* 3/23/98 /s/ RONALD V. JOYCE* 3/23/98
- ----------------------------------- ----------------------------------------
R. David Thomas, Senior Ronald V. Joyce, Director
Chairman of the Board and
Founder, Director
/s/ GORDON F. TETER* 3/23/98 /s/ FREDERICK R. REED 3/23/98
- ----------------------------------- ----------------------------------------
Gordon F. Teter, Chairman of the Frederick R. Reed, Chief Financial Officer,
Board, Chief Executive Officer and General Counsel and Secretary, Director
President, Director
/s/ RONALD E. MUSICK* 3/23/98 /s/ PAUL D. HOUSE* 3/23/98
- ----------------------------------- ----------------------------------------
Ronald E. Musick, Executive Vice Paul D. House, Director
President, Director
/s/ LAWRENCE A. LAUDICK* 3/23/98 /s/ W. CLAY HAMNER* 3/23/98
- ----------------------------------- ----------------------------------------
Lawrence A. Laudick, Senior Vice W. Clay Hamner, Director
President, General Controller
and Assistant Secretary
/s/ ERNEST S. HAYECK* 3/23/98 /s/ JANET HILL* 3/23/98
- ----------------------------------- ----------------------------------------
Ernest S. Hayeck, Director Janet Hill, Director
/s/ THOMAS F. KELLER* 3/23/98 /s/ TRUE H. KNOWLES* 3/23/98
- ----------------------------------- ----------------------------------------
Thomas F. Keller, Director True H. Knowles, Director
/s/ ANDREW G. McCAUGHEY* 3/23/98 /s/ FIELDEN B. NUTTER, SR.* 3/23/98
- ----------------------------------- ----------------------------------------
Andrew G. McCaughey, Director Fielden B. Nutter, Sr., Director
/s/ JAMES V. PICKETT* 3/23/98 /s/ THEKLA R. SHACKELFORD* 3/23/98
- ----------------------------------- ----------------------------------------
James V. Pickett, Director Thekla R. Shackelford, Director
By /s/ FREDERICK R. REED 3/23/98
-------------------------------------
Frederick R. Reed
Attorney-in-Fact
32
33
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 Items 14(a)
and 14(d) 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 28, 1997 and December 29,
1996, and the consolidated results of their operations and their cash flows for
the years ended December 28, 1997, December 29, 1996 and December 31, 1995, 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 4, 1998
- --------------------------------------------------------------------------------
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-8 (File Nos. 2-67253,
2-98696, 33-18177, 2-82823, 33-36602, 33-36603, 333-9261, 333-32675 and
33-57913) of our report dated February 4, 1998 on our audits of the consolidated
financial statements and financial statement schedule of Wendy's International,
Inc. and Subsidiaries as of December 28, 1997 and December 29, 1996, and for the
years ended December 28, 1997, December 29, 1996 and December 31, 1995, which
report is included in this Annual Report on Form 10-K.
Columbus, Ohio COOPERS & LYBRAND L.L.P.
March 23, 1998
33
34
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 28, 1997:
Reserve for royalty receivables $ 2,044 $ 71 $ (153) $ 1,962
Reserve for possible franchise-
related losses & contingencies 6,630 109 (856) 5,883
-------- -------- -------- --------
$ 8,674 $ 180 $ (1,009) $ 7,845
-------- -------- -------- --------
Fiscal year ended December 29, 1996:
Reserve for royalty receivables $ 3,579 $ (1,294) $ (241) $ 2,044
Reserve for possible franchise-
related losses & contingencies 7,231 1,011 (1,612) 6,630
-------- -------- -------- --------
$ 10,810 $ (283) $ (1,853) $ 8,674
-------- -------- -------- --------
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
======== ======== ======== ========
(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 Sheet as follows:
December 28, December 29, December 31,
1997 1996 1995
------- ------- -------
Deducted from accounts receivable $ 5,979 $ 4,339 $ 7,363
Deducted from notes receivable - current 106 480 642
Deducted from notes receivable - long-term 1,255 2,355 2,516
Included in accrued expenses - other 505 1,500 289
------- ------- -------
$ 7,845 $ 8,674 $10,810
======= ======= =======
34
35
- --------------------------------------------------------------------------------
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 Ontario Inc., 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 Incorporated by reference to Exhibit 2.6
of 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-Q for the quarter
ended March 31, 1996.
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36
*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 for subordinated debt securities Incorporated herein by reference from
between the Company and NBD Bank, as Exhibit 4(a) of Form 10-Q for the quarter
trustee. ended September 29, 1996.
(c) First Supplemental Indenture between the Incorporated herein by reference from
Company and NBD Bank Exhibit 4(b) of Form 10-Q for the quarter
ended September 29, 1996.
(d) Amended and Restated Declaration of Trust Incorporated herein by reference from
of Wendy's Financing I Exhibit 4(c) of Form 10-Q for the quarter
ended September 29, 1996.
(e) Certificate P-1 Evidencing Trust Preferred Incorporated herein by reference from
Securities of Wendy's Financing I Exhibit 4(d) of Form 10-Q for the quarter
ended September 29, 1996.
(f) Certificate P-2 Evidencing Trust Preferred Incorporated herein by reference from
Securities of Wendy's Financing I Exhibit 4(e) of Form 10-Q for the quarter
ended September 29, 1996.
(g) Preferred Securities Guarantee Agreement Incorporated herein by reference from
for the benefit of the holders of Trust Exhibit 4(f) of Form 10-Q for the quarter
Preferred Securities of Wendy's Financing I ended September 29, 1996.
(h) 5% Convertible Subordinated Debenture Incorporated herein by reference from
of the Company Exhibit 4(g) of Form 10-Q for the quarter
ended September 29, 1996.
(i) Amended and Restated Rights Agreement Incorporated herein by reference from
between the Company and American Stock Amendment No. 2 to Form 8-A/1A Registration
Transfer and Trust Company Statement, File No. 1-8116.
10(a) Sample Key Executive Agreement between Incorporated herein by reference from
the Company and Mr. Thomas. The Exhibit 10(a) of Form 10-K for the year
Employment Term is ten years for Mr. ended January 3, 1993.
Thomas.
(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, Rath, Reed, ended January 3, 1993.
Schuessler, Teter, Mrs. Chesnut and
Mrs. McGinnis
(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) 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.
(e) Employment Agreement between The Incorporated herein by reference from
TDL Group Ltd. (a subsidiary of the Exhibit 10(f) of Form 10-K for the year
Company) and Ronald Vaughn Joyce ended December 31, 1995.
* 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.
36
37
(f) Amendment to Employment Agreement Incorporated herein by reference from
between The TDL Group Ltd. (a subsidiary Exhibit 10 of Form 10-Q for the quarter
of the Company) and Ronald Vaughn Joyce ended March 31, 1996.
(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 Incorporated herein by reference from
Maximization Plan Exhibit 10(f) of Form 10-K for the year
ended January 3, 1993.
(i) Description of Management Incentive Plan 38
(j) Supplemental Executive Retirement Plan, Incorporated herein by reference from
as amended Exhibit 10(j) of Form 10-K for the year
ended December 31, 1995.
(k) 1978 Non-Qualified Stock Option Plan, Incorporated herein by reference from
as amended the Company's Definitive Proxy
Statement, dated March 11, 1994.
(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 5, 1997.
21 Subsidiaries of the Registrant 39
23 Consent of Coopers & Lybrand L.L.P. Incorporated by reference to page 33
of this Form 10-K.
24 Powers of Attorney 40-54
99 Safe harbor under the Private Securities 55-56
Litigation Reform Act of 1995
37