Attached files
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EX-32.1 - CERTIFICATE OF CEO AND CFO - Wendy's/Arby's Restaurants, LLC | exhibit32-1_111209.htm |
EX-31.2 - CERTIFICATE OF CHIEF FINANCIAL OFFICER - Wendy's/Arby's Restaurants, LLC | exhibit31-2_111209.htm |
EX-31.1 - CERTIFICATE OF CHIEF EXECUTIVE OFFICER - Wendy's/Arby's Restaurants, LLC | exhibit31-1_111209.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(X)
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 27, 2009
OR
( )
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ______________ to _______________
Commission
file number: 333-161613
WENDY’S/ARBY’S RESTAURANTS,
LLC
(Exact
name of registrant as specified in its charter)
Delaware
|
38-0471180
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
1155
Perimeter Center West, Atlanta, GA
|
30338
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(678)
514-4100
|
||
(Registrant’s
telephone number, including area code)
|
||
(Former
name, former address and former fiscal year, if changed since
last report)
|
||
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 [
] No [X]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes [ ] No [
]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “accelerated filer,” “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [ ] Accelerated
filer [ ] Non-accelerated
filer [X] Smaller
reporting company [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes [ ] No [X]
PART
I. FINANCIAL INFORMATION
Item 1. Financial
Statements.
WENDY’S/ARBY’S RESTAURANTS, LLC AND SUBSIDIARIES
CONDENSED
COMBINED BALANCE SHEETS
(In
Thousands)
September
27,
|
December
28,
|
|||||||
2009
|
2008
|
|||||||
ASSETS
|
(Unaudited)
|
|||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 616,870 | $ | 63,080 | ||||
Restricted
cash equivalents
|
986 | 20,792 | ||||||
Accounts
and notes receivable
|
85,680 | 91,347 | ||||||
Inventories
|
21,991 | 24,647 | ||||||
Prepaid
expenses and other current assets
|
33,585 | 23,650 | ||||||
Deferred
income tax benefit
|
19,934 | 28,337 | ||||||
Advertising
fund restricted assets
|
81,622 | 81,139 | ||||||
Total
current assets
|
860,668 | 332,992 | ||||||
Restricted
cash equivalents
|
5,842 | 6,462 | ||||||
Investments
|
103,999 | 96,523 | ||||||
Properties
|
1,655,502 | 1,754,920 | ||||||
Goodwill
|
883,601 | 859,052 | ||||||
Other
intangible assets
|
1,398,530 | 1,411,420 | ||||||
Deferred
costs and other assets
|
61,081 | 40,969 | ||||||
Total
assets
|
$ | 4,969,223 | $ | 4,502,338 | ||||
LIABILITIES
AND EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Current
portion of long-term debt
|
$ | 16,558 | $ | 29,537 | ||||
Accounts
payable
|
85,404 | 135,245 | ||||||
Accrued
expenses and other current liabilities
|
296,654 | 230,763 | ||||||
Advertising
fund restricted liabilities
|
81,622 | 81,139 | ||||||
Total
current liabilities
|
480,238 | 476,684 | ||||||
Long-term
debt
|
1,487,562 | 1,060,150 | ||||||
Due
to Wendy’s/Arby’s Group, Inc.
|
3,901 | 11,785 | ||||||
Deferred
income
|
29,367 | 16,860 | ||||||
Deferred
income taxes
|
512,726 | 526,658 | ||||||
Other
liabilities
|
165,421 | 155,426 | ||||||
Invested
equity:
|
||||||||
Member
interest, $0.01 par value; 1,000 shares authorized, one issued and
outstanding
|
- | - | ||||||
Other
capital
|
2,931,332 | 2,958,921 | ||||||
Accumulated
deficit
|
(474,116 | ) | (506,511 | ) | ||||
Advances
to Wendy’s/Arby’s Group, Inc.
|
(155,000 | ) | (155,000 | ) | ||||
Accumulated
other comprehensive loss
|
(12,208 | ) | (42,635 | ) | ||||
Total
invested equity
|
2,290,008 | 2,254,775 | ||||||
Total
liabilities and invested equity
|
$ | 4,969,223 | $ | 4,502,338 |
See
accompanying notes to unaudited condensed combined financial
statements.
1
WENDY’S/ARBY’S
RESTAURANTS, LLC AND SUBSIDIARIES
CONDENSED
COMBINED STATEMENTS OF OPERATIONS
(In
Thousands Except Per Share Amounts)
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
27,
|
September
28,
|
September
27,
|
September
28,
|
|||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(Unaudited)
|
||||||||||||||||
Revenues:
|
||||||||||||||||
Sales
|
$ | 806,038 | $ | 287,641 | $ | 2,395,476 | $ | 860,560 | ||||||||
Franchise
revenues
|
97,183 | 22,730 | 284,416 | 65,679 | ||||||||||||
903,221 | 310,371 | 2,679,892 | 926,239 | |||||||||||||
Costs
and expenses:
|
||||||||||||||||
Cost
of sales
|
684,071 | 239,880 | 2,046,475 | 718,317 | ||||||||||||
General
and administrative
|
96,910 | 26,350 | 309,973 | 98,008 | ||||||||||||
Depreciation
and amortization
|
46,940 | 15,875 | 141,999 | 45,978 | ||||||||||||
Impairment
of long-lived assets
|
15,528 | 4,581 | 28,932 | 5,998 | ||||||||||||
Facilities
relocation and restructuring
|
1,725 | (46 | ) | 5,892 | 81 | |||||||||||
Other
operating (income) expense, net
|
(485 | ) | - | 1,246 | (487 | ) | ||||||||||
844,689 | 286,640 | 2,534,517 | 867,895 | |||||||||||||
Operating
profit
|
58,532 | 23,731 | 145,375 | 58,344 | ||||||||||||
Interest
expense
|
(35,899 | ) | (13,696 | ) | (88,262 | ) | (41,512 | ) | ||||||||
Other
income (expense), net
|
755 | 132 | (3,966 | ) | 589 | |||||||||||
Income
before income taxes
|
23,388 | 10,167 | 53,147 | 17,421 | ||||||||||||
Provision
for income taxes
|
(9,168 | ) | (3,798 | ) | (20,752 | ) | (6,742 | ) | ||||||||
Net
income
|
$ | 14,220 | $ | 6,369 | $ | 32,395 | $ | 10,679 |
See
accompanying notes to unaudited condensed combined financial
statements.
2
WENDY’S/ARBY’S
RESTAURANTS, LLC AND SUBSIDIARIES
CONDENSED
COMBINED STATEMENTS OF CASH FLOWS
(In
Thousands)
Nine
Months Ended
|
||||||||
September
27,
|
September
28,
|
|||||||
2009
|
2008
|
|||||||
(Unaudited)
|
||||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ | 32,395 | $ | 10,679 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
141,999 | 45,978 | ||||||
Impairment
of long-lived assets
|
28,932 | 5,997 | ||||||
Other
operating transactions with Wendy’s/Arby’s Group, Inc.
|
16,643 | (10,364 | ) | |||||
Write-off
and amortization of deferred financing costs
|
13,882 | 2,155 | ||||||
Net
receipt of deferred vendor incentive
|
13,016 | 3,743 | ||||||
Share-based
compensation provision
|
10,128 | 3,666 | ||||||
Non-cash
rent expense
|
9,907 | (139 | ) | |||||
Distributions
received from joint venture
|
7,106 | - | ||||||
Deferred
income tax (benefit) provision, net
|
(26,963 | ) | 5,985 | |||||
Other,
net
|
2,638 | (394 | ) | |||||
Changes
in operating assets and liabilities, net
|
26,750 | (7,121 | ) | |||||
Net
cash provided by operating activities
|
276,433 | 60,185 | ||||||
Cash
flows from investing activities:
|
||||||||
Capital
expenditures
|
(65,280 | ) | (58,401 | ) | ||||
Proceeds
from dispositions
|
9,386 | 690 | ||||||
Cost
of acquisitions, less cash acquired
|
(664 | ) | (9,540 | ) | ||||
Other,
net
|
2,968 | (391 | ) | |||||
Net
cash used in investing activities
|
(53,590 | ) | (67,642 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from long-term debt
|
556,006 | 33,668 | ||||||
Repayments
of long-term debt
|
(153,754 | ) | (87,162 | ) | ||||
Deferred
financing costs
|
(37,976 | ) | - | |||||
Capital
contributions from Wendy’s/Arby’s Group, Inc.
|
- | 35,146 | ||||||
Dividends
paid to Wendy’s/Arby’s Group, Inc.
|
(35,000 | ) | - | |||||
Net
cash provided by (used in) financing activities
|
329,276 | (18,348 | ) | |||||
Net
cash provided by (used in) operations before effect of exchange
rate changes on cash
|
552,119 | (25,805 | ) | |||||
Effect
of exchange rate changes on cash
|
1,671 | - | ||||||
Net
increase (decrease) in cash and cash equivalents
|
553,790 | (25,805 | ) | |||||
Cash
and cash equivalents at beginning of period
|
63,080 | 44,056 | ||||||
Cash
and cash equivalents at end of period
|
$ | 616,870 | $ | 18,251 |
See accompanying notes to unaudited condensed combined financial statements.
3
WENDY’S/ARBY’S
RESTAURANTS, LLC AND SUBSIDIARIES
CONDENSED
COMBINED STATEMENTS OF CASH FLOWS
(In
Thousands)
Nine
Months Ended
|
||||||||
September
27,
|
September
28,
|
|||||||
2009
|
2008
|
|||||||
(Unaudited)
|
||||||||
Supplemental
disclosures of cash flow information:
|
||||||||
Cash
paid during the period in operations for:
|
||||||||
Interest
|
$ | 52,963 | $ | 37,436 | ||||
Income
taxes, net of refunds, to non-affiliates
|
$ | 5,808 | $ | 1,383 | ||||
Supplemental
schedule of non-cash investing and financing activities:
|
||||||||
Total
capital expenditures
|
$ | 70,990 | $ | 66,039 | ||||
Cash
capital expenditures
|
(65,280 | ) | (58,401 | ) | ||||
Non-cash
capitalized lease and certain sales-leaseback transactions
|
$ | 5,710 | $ | 7,638 |
See
accompanying notes to unaudited condensed combined financial
statements.
4
WENDY’S/ARBY’S
RESTAURANTS, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED COMBINED FINANCIAL STATEMENTS
(In
Thousands)
(1) Basis
of Presentation
The
accompanying unaudited condensed combined financial statements (the “Financial
Statements”) of Wendy’s/Arby’s Restaurants, LLC (“Wendy’s/Arby’s Restaurants”
and, together with its subsidiaries, the “Company”, “we”, “us” or “our”), a
direct wholly owned subsidiary of Wendy’s/Arby’s Group, Inc. (“Wendy’s/Arby’s”),
have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”) for interim financial information and,
therefore, do not include all information and footnotes required by GAAP for
complete financial statements. In our opinion, however, the Financial Statements
contain all adjustments necessary to present fairly our financial position as of
September 27, 2009 and results of our operations for the three months and nine
months ended September 27, 2009 and September 28, 2008 and our cash flows for
the nine months ended September 27, 2009 and September 28, 2008. The results of
operations for the three months and nine months ended September 27, 2009 are not
necessarily indicative of the results to be expected for the full 2009 fiscal
year. These Financial Statements should be read in conjunction with the audited
combined financial statements and notes thereto included in the Company’s
Registration Statement on Form S-4
filed with the U.S. Securities and Exchange Commission (the “SEC”) on August 28,
2009 (registration number 333-161613), as amended by amendments to the Form S-4
filed on October 6, October 27 and November 5, 2009 (the “Form S-4”). In
addition, in preparing the Financial Statements, we have reviewed and considered
all significant events occurring subsequent to September 27, 2009 and up until
November
12, 2009, the date of the issuance of the Financial
Statements.
On
September 29, 2008 (the “Closing Date”), Wendy’s/Arby’s (formerly Triarc
Companies, Inc. or “Triarc”) completed the merger (the “Wendy’s Merger”) with
Wendy’s International Inc. (“Wendy’s”). Wendy’s/Arby’s Restaurants was formed by
Wendy’s/Arby’s as a wholly-owned subsidiary holding company in October 2008.
Wendy’s/Arby’s Restaurants’ sole asset at formation consisted of the
contribution by Wendy’s/Arby’s of its investment in Wendy’s. In March 2009,
Wendy’s/Arby’s contributed its longstanding investment in Arby’s Restaurant
Group, Inc. and subsidiaries (“ARG” or “Arby’s”) to Wendy’s/Arby’s
Restaurants. Wendy’s/Arby’s Restaurants has no assets or operations
other than those of Wendy’s and Arby’s.
The
combined financial statements present the historical results of Arby’s and
Wendy’s as if Wendy’s/Arby’s Restaurants had existed as a separate legal entity
by the beginning of the earliest period presented. The combined
financial statements have been derived from the consolidated financial
statements and historical accounting records of
Wendy’s/Arby’s. Accordingly, the combined financial statements
include the results of Arby’s and Wendy’s beginning from their time of ownership
by Wendy’s/Arby’s. As a result, financial results for periods prior
to September 29, 2008 include solely the financial results of
Arby’s.
We report
on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to
December 31. All three-month periods presented contain 13 weeks and all
nine-month periods presented contain 39 weeks. Because our 2009 fiscal year,
ending on January 3, 2010, will contain 53 weeks, our fourth quarter will
contain 14 weeks. All references to years and quarters relate to fiscal periods
rather than calendar periods.
(2) Acquisitions
and Dispositions
Merger
with Wendy’s International, Inc.
On
September 29, 2008, Wendy’s/Arby’s completed the Wendy’s Merger. As a result of
the Wendy’s Merger, the accounts of Wendy’s® are included for the three and
nine months ended September 27, 2009, but have not been included for the three
and nine months ended September 28, 2008. The total merger consideration of
$2,515,521 has been allocated to Wendy’s net tangible and intangible assets
acquired and liabilities assumed based on their fair values with the excess
recognized as goodwill. During the nine months ended September 27, 2009, the
preliminary allocation to goodwill of $850,908 at December 28, 2008 was impacted
primarily by changes in the fair values of assets acquired and liabilities
assumed and the finalization of the deferred tax liability related to the
Wendy’s Merger as follows:
Goodwill
as reported at December 28, 2008
|
$ | 850,908 | ||
Change
in total merger consideration:
|
||||
Decrease
in the value of Wendy’s stock options that have been converted into
Wendy’s/Arby’s options
|
(199 | ) | ||
Increase
in Wendy’s Merger costs
|
325 | |||
Changes
to fair values of assets and liabilities and deferred tax liability
related to the merger:
|
||||
Increase
in investments
|
(683 | ) | ||
Increase
in properties
|
(2,738 | ) | ||
Increase
in favorable leases
|
(5,170 | ) | ||
Decrease
in computer software
|
6 | |||
Decrease
in accrued expenses and other current liabilities
|
(3,585 | ) | ||
Increase
in other liabilities
|
15,196 | |||
Increase
in unfavorable leases
|
6,709 | |||
Increase
in deferred income tax liability
|
7,145 | |||
Goodwill
as reported at September 27, 2009
|
$ | 867,914 |
5
WENDY’S/ARBY’S
RESTAURANTS, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED COMBINED FINANCIAL STATEMENTS
(In
Thousands)
Other
acquisitions
We
completed the acquisitions of the operating assets, and assumed liabilities, of
45 Arby’s® franchised restaurants during the nine months ended September 28,
2008. The total then estimated consideration for the acquisitions was $15,807
consisting of (1) $8,890 of cash (before consideration of $45 of cash acquired),
(2) the assumption of $6,239 of debt and (3) $678 of related estimated expenses.
The aggregate purchase price of $16,294 also included $693 of losses from the
settlement of unfavorable franchise rights and a $1,180 gain on the termination
of subleases both included in “Other operating (income) expense, net” in the
accompanying unaudited condensed combined statement of operations.
Dispositions
During
the nine months ended September 27, 2009, the Company received proceeds from
dispositions of $9,386 consisting of $3,384 from the sale of ten Wendy’s units
to a franchisee and $6,002 related to other dispositions. These sales resulted
in a net loss of $633 which is included in “Depreciation and
amortization”.
|
(3)
|
Debt
|
Senior
Notes
On June
23, 2009, Wendy’s/Arby’s Restaurants issued $565,000 principal amount of Senior
Notes (the “Senior Notes”). The Senior Notes will mature on July 15, 2016 and
accrue interest at 10.00% per annum, payable semi-annually on January 15 and
July 15, with the first payment on January 15, 2010. The Senior Notes were
issued at 97.533% of the principal amount, representing a yield to maturity of
10.50% and resulting in net proceeds paid to us of $551,061. The $13,939
discount is being accreted and the related charge included in “Interest expense”
until the Senior Notes mature. The Senior Notes are fully and unconditionally
guaranteed, jointly and severally, on an unsecured basis by certain direct and
indirect domestic subsidiaries of Wendy’s/Arby’s Restaurants (collectively, the
“Guarantors”).
Wendy’s/Arby’s
Restaurants incurred approximately $21,105 in costs related to the issuance of
the Senior Notes which are being amortized to interest expense over the Senior
Notes’ term utilizing the effective interest method.
An
Indenture dated as of June 23, 2009 (the “Indenture”) among Wendy’s/Arby’s
Restaurants, the Guarantors and U.S. Bank National Association, as trustee (the
“Trustee”), includes certain customary covenants that, subject to a number of
important exceptions and qualifications, limit the ability of Wendy’s/Arby’s
Restaurants and its restricted subsidiaries to, among other things, incur debt
or issue preferred or disqualified stock, pay dividends on equity interests,
redeem or repurchase equity interests or prepay or repurchase subordinated debt,
make some types of investments and sell assets, incur certain liens, engage in
transactions with affiliates (except on an arms-length basis), and consolidate,
merge or sell all or substantially all of their assets.
On
November 9, 2009, Wendy's/Arby's Restaurants commenced an exchange offer for the
initial notes (the “Initial Notes”) issued on June 23, 2009 pursuant to a
registration rights agreement entered into in connection with the issuance of
the Initial Notes. In the exchange offer, Wendy's/Arby's Restaurants is offering
to exchange its outstanding $565,000 aggregate principal amount of Initial Notes
for a like aggregate amount of its 10% Senior Notes due 2016 registered under
the Securities Act of 1933 (the “Exchange Notes”). The Exchange Notes
issued in the exchange offer will have substantially similar terms as the
Initial Notes, except that the Exchange Notes will have no transfer restrictions
or registration rights. The expiration date of the exchange offer is December 9,
2009, unless extended by Wendy's/Arby's Restaurants.
6
WENDY’S/ARBY’S
RESTAURANTS, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED COMBINED FINANCIAL STATEMENTS
(In
Thousands)
Senior
Secured Term Loan
On June
10, 2009, Wendy’s/Arby’s Restaurants entered into an Amendment No. 1 to the
amended and restated Arby’s Credit Agreement (as so amended, the “Credit
Agreement”) which, among other things (1) permitted the issuance by
Wendy’s/Arby’s Restaurants of the Senior Notes described above and the
incurrence of debt thereunder, and permitted Wendy’s/Arby’s Restaurants to
dividend to Wendy’s/Arby’s the net cash proceeds of the Senior Notes issuance
less amounts used to prepay the senior secured term loan under the Credit
Agreement and pay accrued interest thereon and certain other payments, (2)
modified certain total leverage financial covenants, added certain financial
covenants based on senior secured leverage ratios and modified the minimum
interest coverage ratio, (3) permitted the prepayment at any time prior to
maturity of certain senior notes of Wendy’s and eliminated certain incremental
debt baskets in the covenant prohibiting the incurrence of additional
indebtedness and (4) modified the interest margins to provide that the margins
will fluctuate based on Wendy’s/Arby’s Restaurants’ corporate credit rating.
Wendy’s/Arby’s Restaurants incurred approximately $3,107 in costs related to
Amendment No. 1.
As
amended, the term loan under the Credit Agreement and amounts borrowed under the
revolving credit facility under the Credit Agreement bear interest at our option
at either (i) the Eurodollar Base Rate (as defined in the Credit Agreement), as
adjusted pursuant to applicable regulations (but not less than 2.75%), plus an
interest rate margin of 4.00%, 4.50%, 5.00% or 6.00% per annum, depending on
Wendy’s/Arby’s Restaurants’ corporate credit rating, or (ii) the Base Rate (as
defined in the Credit Agreement), which is the higher of the interest rate
announced by the administrative agent for the Credit Agreement as its base rate
and the Federal funds rate plus 0.50% (but not less that 3.75%), in either case
plus an interest rate margin of 3.00%, 3.50%, 4.00% or 5.00% per annum,
depending on Wendy’s/Arby’s Restaurants’ corporate credit rating. Based on
Wendy’s/Arby’s Restaurants’ corporate credit rating at the effective date of
Amendment No. 1 and as of September 27, 2009, the applicable interest rate
margins available to us were 4.50% for Eurodollar Base Rate borrowings and 3.50%
for Base Rate borrowings. Since the effective date of Amendment No. 1 and as of
September 27, 2009, we have elected to use the Eurodollar Base Rate which
resulted in a rate of 7.25% for the 2009 third quarter.
Concurrent
with the closing of the issuance of the Senior Notes, we prepaid the term loan
under the Credit Agreement in an aggregate principal amount of $132,500 and
accrued interest thereon.
Derivatives
During
the third quarter of 2009, we entered into several interest rate swap agreements
(the “Interest Rate Swaps”) with notional amounts totaling $361,000 that swap
the fixed rate interest rates on our 6.20% and 6.25% Wendy’s Senior Notes for
floating rates. The Company’s primary objective for entering
into derivative instruments is to manage its exposure to changes in interest
rates, as well as to maintain an appropriate mix of fixed and variable rate
debt.
The
Interest Rate Swaps are accounted for as fair value hedges and qualify for the
short-cut method under the applicable guidance. At September 27, 2009, the fair
value of our Interest Rate Swaps was $2,765 and has been included in “Deferred
costs and other assets” and as an adjustment to the carrying amount of the 6.20%
and 6.25% Wendy’s Senior Notes in the accompanying balance sheet.
7
WENDY’S/ARBY’S
RESTAURANTS, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED COMBINED FINANCIAL STATEMENTS
(In
Thousands)
(4) Fair
Value Measurement of Financial Assets and Liabilities
The
carrying amounts and estimated fair values of the Company’s financial assets and
liabilities were as follows:
September
27, 2009
|
||||||||
Carrying
Amount
|
Fair
Value
|
|||||||
Financial
assets:
|
||||||||
Cash
and cash equivalents (a)
|
$ | 616,870 | $ | 616,870 | ||||
Restricted
cash equivalents (a):
|
||||||||
Current
|
986 | 986 | ||||||
Non-current
|
5,842 | 5,842 | ||||||
Non-current
investment (b)
|
4,620 | 5,228 | ||||||
Interest
Rate Swaps (c)
|
2,765 | 2,765 | ||||||
Financial
liabilities:
|
||||||||
Long-term
debt, including current portion:
|
||||||||
10.00%
Senior Notes (d)
|
551,413 | 597,770 | ||||||
Senior
secured term loan, weighted average effective interest of 7.25%
(d)
|
252,805 | 254,067 | ||||||
6.20%
senior notes (d)
|
204,455 | 220,500 | ||||||
6.25%
senior notes (d)
|
192,482 | 198,400 | ||||||
Sale-leaseback
obligations (e)
|
125,720 | 121,258 | ||||||
Capitalized
lease obligations (e)
|
91,544 | 87,867 | ||||||
7%
Debentures (d)
|
79,793 | 72,500 | ||||||
Notes
payable, weighted average interest of 7.27% (e)
|
4,402 | 4,367 | ||||||
Other
|
1,506 | 1,482 | ||||||
Total
long-term debt, including current portion
|
$ | 1,504,120 | $ | 1,558,211 | ||||
Guarantees
of:
|
||||||||
Lease
obligations for Arby’s restaurants not operated by the Company
(f)
|
398 | 398 | ||||||
Wendy’s
franchisee loans obligations (g)
|
663 | 663 |
_________________________
(a)
|
The
carrying amounts approximated fair value due to the short-term maturities
of the cash equivalents or restricted cash
equivalents.
|
(b)
|
The
fair value of this non-current cost investment is based on the investment
manager’s statement which includes valuations performed by the investment
manager.
|
(c)
|
The
fair values were based on information provided by the bank counterparties
that is model-driven and whose inputs are observable or whose significant
value drivers are observable. (Level 2
inputs)
|
(d)
|
The
fair values are based on quoted market prices. (Level 1
inputs)
|
(e)
|
The
fair values were determined by discounting the future scheduled principal
payments using an interest rate assuming the same original issuance spread
over a current Treasury bond yield for securities with similar
durations.
|
(f)
|
The
fair value was assumed to reasonably approximate the carrying amount since
the carrying amount represents the fair value as of the acquisition of RTM
Restaurant Group less subsequent
amortization.
|
(g)
|
Wendy’s
provided loan guarantees to various lenders on behalf of franchisees
entering into pooled debt facility arrangements for new store development
and equipment financing. Wendy’s has accrued a liability for the fair
value of these guarantees, the calculation for which was based upon a
weighed average risk percentage established at the inception of each
program.
|
The
carrying amounts of current accounts and notes receivable and non-current notes
receivable approximated fair value due to the related allowance for doubtful
accounts and notes receivable. The carrying amounts of accounts payable and
accrued expenses and advertising fund restricted assets and liabilities
approximated fair value due to the short-term maturities of those
items.
8
WENDY’S/ARBY’S
RESTAURANTS, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED COMBINED FINANCIAL STATEMENTS
(In
Thousands)
(5) Impairment
of Long-lived Assets
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
27,
|
September
28,
|
September
27,
|
September
28,
|
|||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Arby’s
restaurant segment:
|
||||||||||||||||
Impairment
of Company-owned restaurants:
|
||||||||||||||||
Properties
|
$ | 13,923 | $ | 4,053 | $ | 25,719 | $ | 5,207 | ||||||||
Intangible
assets
|
1,319 | 528 | 2,257 | 791 | ||||||||||||
15,242 | 4,581 | 27,976 | 5,998 | |||||||||||||
Wendy’s
restaurant segment:
|
||||||||||||||||
Impairment
of surplus properties:
|
286 | - | 956 | - | ||||||||||||
Total
impairment of long-lived assets
|
$ | 15,528 | $ | 4,581 | $ | 28,932 | $ | 5,998 |
The
Arby’s restaurant segment impairment losses reflect (1) the deterioration in
operating performance of certain restaurants and (2) additional charges for
restaurants impaired in a prior year. The Wendy’s restaurant
segment impairment losses reflect write-downs in the carrying value of surplus
properties and properties held for sale.
Impairment
losses represented the excess of the carrying value over the fair value of the
affected assets and are included in “Impairment of long-lived assets.” The fair
values of impaired assets discussed above for the Arby’s restaurants segment
were estimated based upon the present values of the anticipated cash flows
associated with each asset (a Level 3 estimate). The fair values of the impaired
assets (a Level 3 estimate) discussed above for the Wendy’s restaurants segment
were estimated based upon their expected realizable value, which reflect market
declines in the areas where the properties are located.
(6) Facilities
Relocation and Restructuring
The
facilities relocation and restructuring charges in our restaurant segment for
the nine months ended September
27, 2009 of $5,892 are primarily related to severance costs associated
with the Wendy’s Merger. For the remainder of 2009, we expect to incur
additional facilities relocation and restructuring charges of $1,349 related to
additional severance costs from the Wendy’s Merger.
9
WENDY’S/ARBY’S
RESTAURANTS, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED COMBINED FINANCIAL STATEMENTS
(In
Thousands)
An
analysis of activity in the facilities relocation and restructuring accrual
during the nine months ended September 27, 2009 is as follows:
Nine
Months Ended
|
||||||||||||||||||||||||||||
September
27, 2009
|
||||||||||||||||||||||||||||
Balance | Balance |
Total
|
Total | |||||||||||||||||||||||||
December
28,
|
Adjustment
|
September
27,
|
Expected
to be
|
Incurred
|
||||||||||||||||||||||||
2008
|
Provision
|
Payments
|
(1) | 2009 |
Incurred
|
to
Date
|
||||||||||||||||||||||
Wendy’s
restaurant segment:
|
||||||||||||||||||||||||||||
Cash
obligations:
|
||||||||||||||||||||||||||||
Severance
costs
|
$ | 1,469 | $ | 5,964 | $ | (2,981 | ) | $ | 1,405 | $ | 5,857 | $ | 13,421 | $ | 12,072 | |||||||||||||
Total
Wendy’s restaurant segment
|
1,469 | 5,964 | (2,981 | ) | 1,405 | 5,857 | 13,421 | 12,072 | ||||||||||||||||||||
Arby’s
restaurant segment:
|
||||||||||||||||||||||||||||
Cash
obligations:
|
||||||||||||||||||||||||||||
Employee
relocation costs
|
72 | (72 | ) | - | - | - | 4,579 | 4,579 | ||||||||||||||||||||
Other
|
- | - | - | - | - | 7,471 | 7,471 | |||||||||||||||||||||
72 | (72 | ) | - | - | - | 12,050 | 12,050 | |||||||||||||||||||||
Non-cash
charges
|
- | - | - | - | - | 719 | 719 | |||||||||||||||||||||
Total
Arby’s restaurant segment
|
72 | (72 | ) | - | - | - | 12,769 | 12,769 | ||||||||||||||||||||
$ | 1,541 | $ | 5,892 | $ | (2,981 | ) | $ | 1,405 | $ | 5,857 | $ | 26,190 | $ | 24,841 |
|
(1) This
amount represents the remaining liability for severance costs initially
recorded at Wendy’s/Arby’s and transferred to Wendy’s/Arby’s Restaurants
during 2009.
|
(7) Investment
in Joint Venture with Tim Hortons Inc.
Wendy’s
is a partner in a Canadian restaurant real estate joint venture (“TimWen”) with
Tim Hortons Inc. Wendy’s 50% share of the joint venture is accounted for using
the Equity Method. Our equity in earnings from TimWen is included in “Other
operating expense (income), net”.
Presented
below is a summary of components related to our investment in TimWen included in
our Condensed Combined Balance Sheet and Condensed Combined Statement of
Operations as of and for the nine months ended September 27, 2009.
Balance
at December 28, 2008
|
$ | 89,771 | |||
Equity
in earnings for the nine months ended September 27, 2009
|
8,289 | ||||
Amortization
of purchase price adjustments
|
(2,031 | ) | |||
6,258 |
(a)
|
||||
Distributions
|
(7,106 | ) | |||
Currency
translation adjustment included in “Comprehensive income”
|
10,457 | ||||
Balance
at September 27, 2009
|
$ | 99,380 |
(b)
|
________________________________
|
(a)
|
Equity
in earnings for the nine months ended September 27, 2009 is included in
“Other operating (income) expense,
net”.
|
|
(b)
|
Included
in “Investments”.
|
10
WENDY’S/ARBY’S
RESTAURANTS, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED COMBINED FINANCIAL STATEMENTS
(In
Thousands)
Presented
below is a summary of unaudited financial information of TimWen as of and for
the nine months ended September 27, 2009 in Canadian dollars. The summary
balance sheet financial information does not distinguish between current and
long-term assets and liabilities:
September
27, 2009
|
||||
(Canadian)
|
||||
Balance
sheet information:
|
||||
Properties
|
C$ | 84,223 | ||
Cash
and cash equivalents
|
8,465 | |||
Accounts
receivable
|
5,026 | |||
Other
|
2,168 | |||
C$ | 99,882 | |||
Accounts
payable and accrued liabilities
|
C$ | 1,277 | ||
Other
liabilities
|
10,902 | |||
Partners’
equity
|
87,703 | |||
C$ | 99,882 | |||
Nine
months ended September 27, 2009
|
||||
(Canadian)
|
||||
Income
statement information:
|
||||
Revenues
|
C$ | 28,769 | ||
Income
before income taxes and net income
|
19,281 |
(8) Other
Than Temporary Losses on Investments
We
analyze our unrealized losses on a quarterly basis. Due to current
market conditions and other factors, we recorded other than temporary losses on
investments of $1,957 for the first nine months of 2009 (none in the 2009 third
quarter) attributable primarily to the decline in fair value of one of our cost
investments which is included in “Other income (expense), net.” Any other than
temporary losses on our investments are dependent upon the underlying economics
and/or volatility in their value and may or may not recur in future
periods.
(9) Income
Taxes
The
Company is included in the consolidated Federal and certain state income tax
returns of Wendy’s/Arby’s, but provides for Federal and state income taxes on
the same basis as if the Company and its subsidiaries filed consolidated returns
separate from Wendy’s/Arby’s. Amounts payable for Federal and certain state
income taxes are paid in cash by the Company to Wendy’s/Arby’s under a tax
sharing agreement. During the nine months ended September 27, 2009, the Company
made cash payments of $10,417 to Wendy’s/Arby’s for certain 2008 and estimated
2009 Federal and state income taxes.
The
effective tax rates for the three months ended September 27, 2009 and September
28, 2008 were 39.2% and 37.4%, respectively. These rates vary from the U.S.
Federal statutory rate of 35% due to the effect in the 2009 third quarter of
adjustments related to prior year tax matters and the 2009 and 2008 third
quarter effects of (1) state income taxes, net of Federal income tax benefit,
(2) non-deductible expenses, (3) adjustments to our uncertain tax positions, (4)
changes in our estimated full year tax rates and (5) tax credits.
The
effective tax rates for the nine months ended September 27, 2009 and September
28, 2008 were 39.0% and 38.7%, respectively. These rates vary from the U.S.
Federal statutory rate of 35% due to the 2009 effect of adjustments related to
prior year tax matters and the 2009 and 2008 first nine months effects of (1)
state income taxes, net of Federal income tax benefit, (2) non-deductible
expenses, (3) adjustments to our uncertain tax positions, and (4) tax
credits.
In the
nine months ended September 27, 2009, we increased (decreased) our unrecognized
tax benefits for prior periods by $1,233 for additions and by ($697) for statute
expirations. There were no other significant changes to unrecognized
tax benefits in the nine months ended September 27, 2009 and September 28,
2008.
11
WENDY’S/ARBY’S
RESTAURANTS, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED COMBINED FINANCIAL STATEMENTS
(In
Thousands)
The
Internal Revenue Service (the “IRS”) is currently conducting an examination of
our U.S. Federal income tax return for the 2009 tax year as part of the
Compliance Assurance Program (“CAP”). We participated in the CAP for our tax
period ended December 28, 2008 and prior to the Wendy’s Merger, Wendy’s was a
participant in the CAP since the beginning of the 2006 tax year. CAP is a
voluntary, real-time audit arrangement whereby taxpayers and the IRS address
issues throughout the year as they emerge. Any matters relating to Wendy’s U.S.
Federal income tax returns for 2007 and prior years have been
settled.
Wendy’s/Arby’s
U.S. Federal income tax returns for periods ended December 31, 2006 to September
29, 2008 are not currently under examination by the IRS. Our foreign income tax
returns and Wendy’s foreign income tax returns for periods prior to the Wendy’s
Merger are open to examination primarily for periods ending on or after January
1, 2006. Certain of these foreign income tax returns are currently under
examination. Some of our state income tax returns and some of the Wendy’s state
income tax returns for periods prior to the Wendy’s Merger are currently under
examination. Certain of these states have issued notices of proposed tax
assessments aggregating $4,501. We dispute these notices and believe their
ultimate resolution will not have a material adverse impact on our consolidated
financial position or results of operations.
(10) Invested
Equity
The
following is a summary of the changes in invested equity:
Nine
Months Ended
|
||||||||
September 27,
|
September
28,
|
|||||||
2009
|
2008
|
|||||||
Balance,
beginning of year
|
$ | 2,254,775 | $ | 153,662 | ||||
Cash
capital contribution
|
- | 35,146 | ||||||
Comprehensive
income (1)
|
62,822 | 10,582 | ||||||
Share-based
compensation expense
|
10,128 | 3,666 | ||||||
Dividends
paid to Wendy’s/Arby’s
|
(35,000 | ) | - | |||||
Other
|
(2,717 | ) | 3 | |||||
Balance,
end of period
|
$ | 2,290,008 | $ | 203,059 |
(1) The
following is a summary of the components of comprehensive income, net of income
taxes:
Nine
Months Ended
|
||||||||
September 27,
|
September
28,
|
|||||||
2009
|
2008
|
|||||||
Net
income
|
$ | 32,395 | $ | 10,679 | ||||
Net
change in currency translation adjustment
|
30,415 | (149 | ) | |||||
Net
unrealized pension loss
|
12 | - | ||||||
Net
unrealized gains on cash flow hedges (a)
|
- | 52 | ||||||
Other
comprehensive income
|
30,427 | (97 | ) | |||||
Comprehensive
income
|
$ | 62,822 | $ | 10,582 |
(a)
Net unrealized gains on cash flow hedges:
|
||||
Nine
Months Ended
|
||||
September
28,
|
||||
2008
|
||||
Unrealized
holding losses arising during the period
|
$ | (1,526 | ) | |
Reclassifications
of prior period unrealized holding losses into net income or
loss
|
1,613 | |||
87 | ||||
Income
tax provision
|
(35 | ) | ||
$ | 52 |
12
WENDY’S/ARBY’S
RESTAURANTS, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED COMBINED FINANCIAL STATEMENTS
(In
Thousands)
(11) Business Segments
We manage
and internally report our operations in two brand segments: (1) the operation
and franchising of Wendy’s restaurants, including its wholesale bakery
operations, and (2) the operation and franchising of Arby’s restaurants. We
evaluate segment performance and allocate resources based on each segment’s
operating profit (loss) and other financial and non-financial factors. Prior to
the Wendy’s Merger, we managed and reported our operations as one business
segment.
In the
first quarter of 2009, Wendy’s/Arby’s began charging the restaurant segments for
support services based upon budgeted segment revenues. Prior to that date, the
restaurant segments had directly incurred such costs. Commencing with the second
quarter of 2009, Wendy’s/Arby’s Restaurants established a shared service center
in Atlanta and allocated its operating costs to the restaurant segments based
also on budgeted segment revenues.
The
following is a summary of our segment information:
Three
months ended September 27, 2009
|
||||||||||||||||
Wendy’s
|
Arby’s
|
|||||||||||||||
Restaurants
|
Restaurants
|
Corporate
|
Total
|
|||||||||||||
Revenues:
|
||||||||||||||||
Sales
|
$ | 536,802 | $ | 269,236 | $ | - | $ | 806,038 | ||||||||
Franchise
revenues
|
76,713 | 20,470 | - | 97,183 | ||||||||||||
$ | 613,515 | $ | 289,706 | $ | - | $ | 903,221 | |||||||||
Depreciation
and amortization
|
$ | 31,444 | $ | 14,343 | $ | 1,153 | $ | 46,940 | ||||||||
Operating
profit (loss)
|
$ | 69,876 | $ | (8,862 | ) | $ | (2,482 | ) | $ | 58,532 | ||||||
Interest
expense
|
(35,899 | ) | ||||||||||||||
Other
income, net
|
755 | |||||||||||||||
Income
before income taxes
|
$ | 23,388 |
Nine
months ended September 27, 2009
|
||||||||||||||||
Wendy’s
|
Arby’s
|
|||||||||||||||
Restaurants
|
Restaurants
|
Corporate
|
Total
|
|||||||||||||
Revenues:
|
||||||||||||||||
Sales
|
$ | 1,582,928 | $ | 812,548 | $ | - | $ | 2,395,476 | ||||||||
Franchise
revenues
|
224,006 | 60,410 | - | 284,416 | ||||||||||||
$ | 1,806,934 | $ | 872,958 | $ | - | $ | 2,679,892 | |||||||||
Depreciation
and amortization
|
$ | 96,739 | $ | 42,481 | $ | 2,779 | $ | 141,999 | ||||||||
Operating
profit (loss)
|
$ | 155,400 | $ | (3,950 | ) | $ | (6,075 | ) | $ | 145,375 | ||||||
Interest
expense
|
(88,262 | ) | ||||||||||||||
Other
income, net
|
(3,966 | ) | ||||||||||||||
Income
before income taxes
|
$ | 53,147 |
Wendy’s
Restaurants
|
Arby’s
Restaurants
|
Corporate
(a)
|
Total
|
|||||||||||||
Three
months ended September 27, 2009
|
||||||||||||||||
Cash
capital expenditures
|
$ | 14,029 | $ | 6,799 | $ | 4,437 | $ | 25,265 | ||||||||
Nine
months ended September 27, 2009
|
||||||||||||||||
Cash
capital expenditures
|
$ | 30,614 | $ | 22,660 | $ | 12,006 | $ | 65,280 |
|
(a)
|
The
corporate capital expenditures are primarily related to the establishment
of our shared services center.
|
There
have been no material changes in total assets since the date of the Form S-4
filing, therefore total assets by business segment is not
presented.
13
WENDY’S/ARBY’S
RESTAURANTS, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED COMBINED FINANCIAL STATEMENTS
(In
Thousands)
(12) Transactions
with Related Parties
The
following is a summary of transactions between the Company and its related
parties:
Nine
months ended
|
||||||||
September
27, 2009
|
September
28, 2008
|
|||||||
Wendy’s/Arby’s
cost allocation to restaurant segments (a)
|
$ | 34,085 | $ | - | ||||
Capital
contributions from Wendy’s/Arby’s (b)
|
- | 35,146 | ||||||
Other
transactions with Wendy’s/Arby’s:
|
||||||||
Share-based
compensation (c)
|
10,128 | 3,666 | ||||||
Payments
for Federal and state income tax (d)
|
10,417 | 17,000 | ||||||
Expense
(net credit) under management service agreements (e)
|
3,763 | (1,128 | ) | |||||
Charitable
contributions to the Arby’s Foundation, Inc. (f)
|
500 | 500 | ||||||
Dividends
paid to Wendy’s/Arby’s (g)
|
35,000 | - | ||||||
Senior
Notes fees (h)
|
5,368 | - |
_____________________________
|
(a)
|
For
the first quarter of 2009, Wendy’s/Arby’s charged the restaurant segments
$34,085 for support services. Prior to that date, the
restaurant segments had directly incurred such costs. In the
opinion of management, such allocation is reasonable. These
costs are included in “General and administrative.” During the
nine months ended September 27, 2009, we settled $19,971 of such support
center costs in cash through our intercompany account with
Wendy’s/Arby’s.
|
On the
first day of the second quarter of 2009, we established a shared service center
in Atlanta. As a result, support center costs from that date have
been directly incurred by Wendy’s/Arby’s Restaurants and were allocated to the
restaurant segments based on budgeted revenues.
|
(b)
|
During
the third quarter of 2008, Wendy’s/Arby’s made $35,146 of capital
contributions to Arby’s. The funds were used by Arby’s to make a voluntary
prepayment on the senior secured term
loan.
|
|
(c)
|
The
Company provides share based compensation with respect to Wendy’s/Arby’s
common stock to certain employees. Such compensation cost is allocated by
Wendy’s/Arby’s to the Company and is correspondingly recorded as capital
contributions from Wendy’s/Arby’s.
|
|
(d)
|
The
Company makes payments to Wendy’s/Arby’s under a tax sharing agreement, as
discussed in more detail in Note 9, which are settled in cash with
Wendy’s/Arby’s.
|
|
(e)
|
The
Company receives certain management services, including legal, accounting,
tax, insurance, financial and other management services from
Wendy’s/Arby’s. In connection with the RTM Acquisition, ARG entered into a
management services agreement with Wendy’s/Arby’s effective July 25, 2005
that provides for an initial annual fixed fee of $4,500 plus annual cost
of living adjustments beginning January 1, 2006. Such fees are
included in “General and administrative.” Amounts incurred under such
service arrangements, and other incidental amounts, are settled through
the Company’s intercompany account with Wendy’s/Arby’s. Amounts due to
Wendy’s/Arby’s were $3,901 at September 27, 2009 and $11,785 at December
28, 2008.
|
As a
result of the 2005 agreement with Wendy’s/Arby’s described above, the Company’s
results of operations may not be indicative of those that would be achieved if
the Company had operated on a stand alone basis.
Commencing
in 2008, the Company also provides services to Wendy’s/Arby’s. Costs of the
services that are allocated to Wendy’s/Arby’s are based on actual direct costs
incurred. The Company believes that these allocations were made on a reasonable
basis, and that providing these services to Wendy’s/Arby’s creates cost
efficiencies; however, there has been no study or any attempt to obtain quotes
from third parties to determine what the cost of obtaining such services from
third parties would have been. The reimbursement of these costs totaled $4,854
for the nine months ended September 28, 2008 and are included as a reduction of
“General and administrative” in the accompanying consolidated statements of
operations.
14
WENDY’S/ARBY’S
RESTAURANTS, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED COMBINED FINANCIAL STATEMENTS
(In
Thousands)
|
(f)
|
During
2009 and 2008 the Company paid $500 in each year for expenses on behalf of
The Arby’s Foundation, Inc., a not-for-profit charitable foundation in
which the Company has non-controlling representation on the board of
directors, primarily utilizing funds reimbursed to it by Pepsi as provided
for by the Pepsi contract. Such payments are included in “General and
administrative.”
|
|
(g)
|
The
Company paid $35,000 of periodic cash dividends to Wendy’s/Arby’s. These
dividends were charged to “Invested Equity” during the 2009 first nine
months.
|
|
(h)
|
Approximately
$5,368 in fees for corporate finance advisory services were paid to a
management company which was formed by directors of Wendy’s/Arby’s
including its Chairman of the Board of Directors, who is its former Chief
Executive Officer, its Vice Chairman of the Board of Directors, who is its
former President and Chief Operating Officer, and another director, who is
also its former Vice Chairman of the Board of Directors, in connection
with the issuance of the Senior
Notes.
|
Supply
Chain Relationship Agreement
During
the 2009 fourth quarter, Wendy’s and its franchisees entered into a purchasing
co-op (the “Co-op”) relationship agreement (the “Co-op Agreement”). The Co-op
will manage food and related product purchases and distribution services for the
Wendy’s system in the United States and Canada. The Co-op’s supply chain
management will ensure continuity of supply and provide consolidated purchasing
efficiencies while monitoring possible obsolete inventory. The system’s current
purchasing function is being performed and paid for by Wendy’s. In
order to facilitate the orderly transition of the current purchasing function,
Wendy’s will transfer certain contracts and certain current Wendy’s purchasing
employees to the Co-op in January 2010. Pursuant to the terms of the
Co-op Agreement, Wendy’s is required to pay $15,500 to the Co-op over an 18
month period in order to provide funding for start-up costs and cash reserves,
as well as pay for services provided by the Co-op. Future operations of the
Co-op will be paid by all members of the Co-op. The Co-op, as an independent
organization, is not expected to be consolidated with the Company’s financial
statements. Wendy’s expects to expense all required payments under the Co-op
Agreement in the fourth quarter of 2009.
(13) Legal and Environmental
Matters
The
Company disclosed putative class action complaints in its Form S-4 that had been
filed against Wendy’s, its directors, and in two cases also Wendy’s/Arby’s,
between April 25 and June 13, 2008, alleging breach of fiduciary duties arising
out of the Wendy’s board of directors’ search for a merger partner and out of
its approval of the merger agreement with Wendy’s/Arby’s on April 23, 2008, and
failure to disclose material information related to the merger in Amendment No.
3 to the Wendy’s/Arby’s Form S-4 under the Securities Act of 1933 filed on
August 14, 2008. These cases were described in the Company’s Form S-4 as the
Guiseppone, Henzel, Smith and Ravanis cases.
As noted
in the Company’s Form S-4, on July 1, 2009, the Common Pleas Court of Franklin
County, Ohio entered a final order approving settlement of all claims in the
Guiseppone, Henzel and Smith cases and certifying a class for settlement
purposes only. On July 9, 2009, the Supreme Court of the State of New York, New
York County entered a dismissal of the Ravanis case, with prejudice. The
disposition of these cases was not material to the results of operations or
financial condition of the Company.
In
addition to the matters described above, we are involved in other litigation and
claims incidental to our current and prior businesses. We have reserves for all
of our legal and environmental matters aggregating $3,062 as of September 27,
2009. Although the outcome of these matters cannot be predicted with certainty
and some of these matters may be disposed of unfavorably to us, based on
currently available information, including legal defenses available to us, and
given the aforementioned reserves and our insurance coverage, we do not believe
that the outcome of these legal and environmental matters will have a material
adverse effect on our consolidated financial position or results of
operations.
(14) Accounting
Standards
Accounting
Standards Adopted during 2009
In
December 2007, the Financial Accounting Standards Board (the “FASB”) issued
guidance on business combinations and noncontrolling interests in consolidated
financial statements. This guidance changes the way companies account for
business combinations and noncontrolling interests by, among other things,
requiring (1) more assets and liabilities to be measured at fair value as of the
acquisition date, including a valuation of the entire company being acquired
where less than 100% of the company is acquired, (2) an acquirer in
preacquisition periods to expense all acquisition-related costs, (3) changes in
acquisition related deferred tax balances after the completion of the purchase
price allocation be recognized in the statement of operations as opposed to
through goodwill and (4) noncontrolling interests in subsidiaries initially to
be measured at fair value and classified as a separate component of
stockholders’ equity.
15
WENDY’S/ARBY’S
RESTAURANTS, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED COMBINED FINANCIAL STATEMENTS
(In
Thousands)
In
addition, in April 2008, the FASB issued guidance on the determination of the
useful life of intangible assets. In determining the useful life of acquired
intangible assets, the new guidance removes the requirement to consider whether
an intangible asset can be renewed without substantial cost or material
modifications to the existing terms and conditions and, instead, requires an
entity to consider its own historical experience in renewing similar
arrangements. The new guidance also requires expanded disclosure related to the
determination of intangible asset useful lives.
In April
2009, the FASB issued guidance on accounting for assets acquired and liabilities
assumed in a business combination that arise from contingencies which requires
acquirers to recognize an asset acquired or liability assumed in a business
combination that arises from a contingency at fair value if the acquisition-date
fair value of that asset or liability can be determined during the measurement
period.
The
guidance on business combinations will not impact our recording of the Wendy’s
Merger except for certain potential adjustments to deferred taxes included in
the final allocation of the purchase price. The adoption of the presentation and
disclosure requirements for noncontrolling interests in consolidated financial
statements had no effect on the Company as it does not have any non-controlling
interests. The new guidance on business combinations and
noncontrolling interests in consolidated financial statements will impact future
acquisitions, if any, the effect of which will depend upon the nature and terms
of such agreements.
In March
2008, the FASB published additional disclosure requirements for companies with
derivative instruments and hedging activities that are designed to enable
financial-statement users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under the guidance for accounting for derivative instruments and hedging
activities and how these items affect a company's financial position, results of
operations and cash flows. The guidance affects only these disclosures and does
not change the accounting for derivatives. The guidance has been applied
prospectively beginning with the first quarter of our 2009 fiscal
year.
In April
2009, a FASB Staff Position described expanded required interim disclosures for
all publicly traded entities about the fair value of financial instruments which
included disclosure of the methods and significant assumptions used to estimate
the fair value of financial instruments. We have applied these disclosure
requirements effective with our 2009 second quarter.
In May
2009, the FASB issued guidance that defines the period after the balance sheet
date during which a reporting entity’s management should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial
statements, and the disclosures an entity should make about events or
transactions that occurred after the balance sheet date (collectively,
“Subsequent Events”). The Subsequent Events guidance is effective for interim
and annual periods ending after June 15, 2009, and we have applied the guidance
effective with our 2009 second quarter.
In June
2009, the FASB issued the FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles (the “Codification”) which
authorized the Codification as the sole source for authoritative U.S. GAAP and
any accounting literature that is not in the Codification will be considered
nonauthoritative. We have commenced utilizing the Codification as our sole
source of authoritative US GAAP for our 2009 third quarter.
In
September 2009, the FASB issued additional implementation guidance on accounting
for uncertainty in income taxes. The guidance is effective for interim and
annual periods ending after September 15, 2009. We have applied the new guidance
effective with our 2009 third quarter, such guidance had no impact on our
accounting for uncertainty in income taxes.
16
WENDY’S/ARBY’S
RESTAURANTS, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED COMBINED FINANCIAL STATEMENTS
(In
Thousands)
Accounting
Standards Not Yet Adopted
In June
2009, the FASB issued guidelines on the consolidation of variable interest
entities which alters how a company determines when an entity that is
insufficiently capitalized or not controlled through voting should be
consolidated. A company has to determine whether it should provide consolidated
reporting of an entity based upon the entity's purpose and design and the parent
company's ability to direct the entity's actions. The guidance is effective
commencing with our 2010 fiscal year. We are currently evaluating the effects,
if any, that adoption of this standard will have on our consolidated financial
statements.
In August
2009, the FASB issued a standard on the fair value measurement of liabilities
which is based on an assumed transfer of the liability to a market participant
as of the measurement date and also provides guidance for the measurement of the
fair value of liabilities. The guidance is effective commencing with our 2009
fourth quarter. We are currently evaluating the effects, if any, that adoption
of this standard will have on our consolidated financial
statements.
(15) Guarantor/Non-Guarantor
Wendy’s/Arby’s
Restaurants is the issuer of and certain of its domestic subsidiaries have
guaranteed amounts outstanding under our Senior Notes. Each of the guaranteeing
subsidiaries is a direct or indirect 100% owned subsidiary of the Company and
each has fully and unconditionally guaranteed the Senior Notes on a joint and
several basis.
The
following are included in the presentation of our consolidating (1) Condensed
Combining Balance Sheet as of September 27, 2009 and December 28, 2008, (2)
Condensed Combining Statement of Operations for the three months and nine months
ended September 27, 2009 and September 28, 2008 and (3) Condensed Combining
Statement of Cash Flows for the nine months ended September 27, 2009 and
September 28, 2008 to reflect:
(a)
Wendy’s/Arby’s Restaurants (the “Parent”);
(b) the
guarantor subsidiaries as a group;
(c) the
non-guarantor subsidiaries as a group;
(d) elimination entries
necessary to combine the Parent with the guarantor and non-guarantor
subsidiaries; and
(e) Wendy’s/Arby’s
Restaurants on a consolidated basis.
All of
our domestic restricted subsidiaries that guarantee our senior secured credit
facilities are guarantors of the Senior Notes, except as set forth
below:
|
·
|
Scioto
Insurance Company, a Vermont captive insurance company (“Scioto”), and
Oldemark LLC (“Oldemark”), Scioto’s wholly owned subsidiary, are subject
to regulatory restrictions under Vermont insurance law that require
governmental approval before they can incur guarantees. Each of these
subsidiaries guarantee our senior secured credit facilities on a limited
basis (limited to the lesser of (i) $200 million, or (ii) 90% of the
excess of their total assets over their total liabilities (as determined
in accordance with the terms of the guarantee)), but do not guarantee the
Senior Notes. Oldemark owns substantially all of the U.S.
trademarks and other intellectual property associated with the Wendy’s
brand.
|
|
·
|
In
addition, certain of our subsidiaries, including our foreign subsidiaries,
do not guarantee our credit facilities and do not guarantee the Senior
Notes.
|
In
connection with the preparation of this Form 10-Q, we identified an error in the
presentation of general and administrative expenses ("G&A") in the condensed
combining statements of operations for the six months ended June 28, 2009 and
the year ended December 28, 2008 (which have been included in the Company’s Form
S-4 and will be corrected when such statements are presented in future
filings). G&A of the Non-guarantor Subsidiaries was overstated
and G&A of the Guarantor Subsidiaries was understated by approximately
$34,300 for the six months ended June 28, 2009 and $17,200 for the year ended
December 28, 2008. The presentation has been corrected in the
preparation of the condensed combining statement of operations for the nine
months ended September 27, 2009; there is no impact on the condensed combining
statement of operations for the three months ended September 27,
2009. This correction also had no impact on the reported amounts of
net cash provided by operating activities in the related condensed combining
statements of cash flows. We believe the effect of these prior period
corrections are not material to any prior period condensed combining financial
statements and they have no effect on our condensed combined financial
statements.
For purposes of presentation of such
consolidating information, investments in subsidiaries are accounted for by the
Parent on the equity method, as if Wendy’s/Arby’s Restaurants had existed as a
separate legal entity by the beginning of the earliest period
presented. The elimination entries are principally necessary to
eliminate intercompany balances and transactions.
17
WENDY’S/ARBY’S
RESTAURANTS, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED COMBINED FINANCIAL STATEMENTS
(In
Thousands)
CONDENSED
COMBINING BALANCE SHEET
September
27, 2009
Guarantor
|
Non-guarantor
|
|||||||||||||||||||
Parent
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Total
|
||||||||||||||||
ASSETS
|
||||||||||||||||||||
Current
assets:
|
||||||||||||||||||||
Cash
and cash equivalents
|
$ | 364,293 | $ | 229,647 | $ | 22,930 | $ | - | $ | 616,870 | ||||||||||
Restricted
cash equivalents
|
- | 986 | - | - | 986 | |||||||||||||||
Accounts
and notes receivable
|
35,632 | 82,674 | 2,974 | (35,600 | ) | 85,680 | ||||||||||||||
Inventories
|
- | 20,958 | 1,033 | - | 21,991 | |||||||||||||||
Prepaid
expenses and other current assets
|
4,164 | 28,493 | 928 | - | 33,585 | |||||||||||||||
Deferred
income tax benefit
|
- | 19,934 | - | - | 19,934 | |||||||||||||||
Advertising
funds restricted assets
|
- | - | 81,622 | - | 81,622 | |||||||||||||||
Total
current assets
|
404,089 | 382,692 | 109,487 | (35,600 | ) | 860,668 | ||||||||||||||
Due
from affiliates
|
147,607 | - | 1,214,805 | (1,362,412 | ) | - | ||||||||||||||
Restricted
cash equivalents
|
- | 5,842 | - | - | 5,842 | |||||||||||||||
Investments
|
- | 4,619 | 99,380 | - | 103,999 | |||||||||||||||
Properties
|
10,045 | 1,585,138 | 60,319 | - | 1,655,502 | |||||||||||||||
Goodwill
|
- | 172,952 | 710,649 | - | 883,601 | |||||||||||||||
Other
intangible assets
|
10,306 | 243,466 | 1,144,758 | - | 1,398,530 | |||||||||||||||
Net
investment in subsidiaries
|
2,301,780 | 2,713,491 | - | (5,015,271 | ) | - | ||||||||||||||
Deferred
costs and other assets
|
20,316 | 101,989 | 5,440 | (66,664 | ) | 61,081 | ||||||||||||||
Total
assets
|
$ | 2,894,143 | $ | 5,210,189 | $ | 3,344,838 | $ | (6,479,947 | ) | $ | 4,969,223 | |||||||||
LIABILITIES
AND INVESTED EQUITY
|
||||||||||||||||||||
Current
liabilities:
|
||||||||||||||||||||
Current
portion of long-term debt
|
$ | 222 | $ | 16,111 | $ | 225 | $ | - | $ | 16,558 | ||||||||||
Accounts
payable
|
1,989 | 77,505 | 5,910 | - | 85,404 | |||||||||||||||
Accrued
expenses and other current liabilities
|
22,147 | 205,849 | 104,258 | (35,600 | ) | 296,654 | ||||||||||||||
Advertising
funds restricted liabilities
|
- | - | 81,622 | - | 81,622 | |||||||||||||||
Total
current liabilities
|
24,358 | 299,465 | 192,015 | (35,600 | ) | 480,238 | ||||||||||||||
Long-term
debt
|
551,835 | 933,645 | 2,082 | - | 1,487,562 | |||||||||||||||
Due
to affiliates
|
- | 1,366,313 | - | (1,362,412 | ) | 3,901 | ||||||||||||||
Deferred
income
|
- | 28,646 | 721 | - | 29,367 | |||||||||||||||
Deferred
income taxes
|
27,937 | 124,935 | 426,518 | (66,664 | ) | 512,726 | ||||||||||||||
Other
liabilities
|
5 | 155,405 | 10,011 | - | 165,421 | |||||||||||||||
Invested
equity:
|
||||||||||||||||||||
Member
interest, $0.01 par value; 1,000 shares authorized, issued and
outstanding
|
- | - | - | - | - | |||||||||||||||
Other
capital
|
2,931,332 | 2,928,907 | 2,553,177 | (5,482,084 | ) | 2,931,332 | ||||||||||||||
(Accumulated
deficit) retained earnings
|
(474,116 | ) | (459,919 | ) | 172,248 | 287,671 | (474,116 | ) | ||||||||||||
Advances
to Wendy’s/Arby’s
|
(155,000 | ) | (155,000 | ) | - | 155,000 | (155,000 | ) | ||||||||||||
Accumulated
other comprehensive loss
|
(12,208 | ) | (12,208 | ) | (11,934 | ) | 24,142 | (12,208 | ) | |||||||||||
Total
invested equity
|
2,290,008 | 2,301,780 | 2,713,491 | (5,015,271 | ) | 2,290,008 | ||||||||||||||
Total
liabilities and invested equity
|
$ | 2,894,143 | $ | 5,210,189 | $ | 3,344,838 | $ | (6,479,947 | ) | $ | 4,969,223 |
18
WENDY’S/ARBY’S
RESTAURANTS, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED COMBINED FINANCIAL STATEMENTS
(In
Thousands)
CONDENSED
COMBINING BALANCE SHEET
December
28, 2008
Guarantor
|
Non-guarantor
|
|||||||||||||||||||
Parent
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Total
|
||||||||||||||||
ASSETS
|
||||||||||||||||||||
Current
assets:
|
||||||||||||||||||||
Cash
and cash equivalents
|
$ | - | $ | 53,982 | $ | 9,098 | $ | - | $ | 63,080 | ||||||||||
Restricted
cash equivalents
|
- | 20,792 | - | - | 20,792 | |||||||||||||||
Accounts
and notes receivable
|
- | 88,436 | 2,911 | - | 91,347 | |||||||||||||||
Inventories
|
- | 23,632 | 1,015 | - | 24,647 | |||||||||||||||
Prepaid
expenses and other current assets
|
- | 22,842 | 808 | - | 23,650 | |||||||||||||||
Deferred
income tax benefit
|
- | 28,337 | - | - | 28,337 | |||||||||||||||
Advertising
funds restricted assets
|
- | - | 81,139 | - | 81,139 | |||||||||||||||
Total
current assets
|
- | 238,021 | 94,971 | - | 332,992 | |||||||||||||||
Due
from affiliates
|
- | - | 1,290,504 | (1,290,504 | ) | - | ||||||||||||||
Restricted
cash equivalents
|
- | 6,462 | - | - | 6,462 | |||||||||||||||
Investments
|
- | 6,751 | 89,772 | - | 96,523 | |||||||||||||||
Properties
|
- | 1,705,204 | 49,716 | - | 1,754,920 | |||||||||||||||
Goodwill
|
- | 150,052 | 709,000 | - | 859,052 | |||||||||||||||
Other
intangible assets
|
- | 208,247 | 1,203,173 | - | 1,411,420 | |||||||||||||||
Net
investment in subsidiaries
|
2,254,775 | 2,856,422 | - | (5,111,197 | ) | - | ||||||||||||||
Deferred
costs and other assets
|
- | 35,512 | 5,457 | - | 40,969 | |||||||||||||||
Total
assets
|
$ | 2,254,775 | $ | 5,206,671 | $ | 3,442,593 | $ | (6,401,701 | ) | $ | 4,502,338 | |||||||||
LIABILITIES
AND INVESTED EQUITY
|
||||||||||||||||||||
Current
liabilities:
|
||||||||||||||||||||
Current
portion of long-term debt
|
$ | - | $ | 29,349 | $ | 188 | $ | - | $ | 29,537 | ||||||||||
Accounts
payable
|
- | 128,394 | 6,851 | - | 135,245 | |||||||||||||||
Accrued
expenses and other current liabilities
|
- | 175,636 | 55,127 | - | 230,763 | |||||||||||||||
Advertising
funds restricted liabilities
|
- | - | 81,139 | - | 81,139 | |||||||||||||||
Total
current liabilities
|
- | 333,379 | 143,305 | - | 476,684 | |||||||||||||||
Long-term
debt
|
- | 1,058,120 | 2,030 | - | 1,060,150 | |||||||||||||||
Due
to affiliates
|
- | 1,302,289 | - | (1,290,504 | ) | 11,785 | ||||||||||||||
Deferred
income
|
- | 16,128 | 732 | - | 16,860 | |||||||||||||||
Deferred
income taxes
|
- | 91,292 | 435,366 | - | 526,658 | |||||||||||||||
Other
liabilities
|
- | 150,688 | 4,738 | - | 155,426 | |||||||||||||||
Invested
equity:
|
||||||||||||||||||||
Member
interest, $0.01 par value; 1,000 shares authorized, issued and
outstanding
|
- | - | - | - | - | |||||||||||||||
Other
capital
|
2,958,921 | 2,958,921 | 2,850,981 | (5,809,902 | ) | 2,958,921 | ||||||||||||||
Accumulated
deficit
|
(506,511 | ) | (506,511 | ) | 47,792 | 458,719 | (506,511 | ) | ||||||||||||
Advances
to Wendy’s/Arby’s
|
(155,000 | ) | (155,000 | ) | - | 155,000 | (155,000 | ) | ||||||||||||
Accumulated
other comprehensive loss
|
(42,635 | ) | (42,635 | ) | (42,351 | ) | 84,986 | (42,635 | ) | |||||||||||
Total
invested equity
|
2,254,775 | 2,254,775 | 2,856,422 | (5,111,197 | ) | 2,254,775 | ||||||||||||||
Total
liabilities and invested equity
|
$ | 2,254,775 | $ | 5,206,671 | $ | 3,442,593 | $ | (6,401,701 | ) | $ | 4,502,338 |
19
WENDY’S/ARBY’S
RESTAURANTS, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED COMBINED FINANCIAL STATEMENTS
(In
Thousands)
CONDENSED
COMBINING STATEMENT OF OPERATIONS
For
the three months ended September 27, 2009
Guarantor
|
Non-guarantor
|
|||||||||||||||||||
Parent
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Total
|
||||||||||||||||
Revenues:
|
||||||||||||||||||||
Sales
|
$ | - | $ | 747,640 | $ | 58,398 | $ | - | $ | 806,038 | ||||||||||
Franchise
revenues
|
- | 91,275 | 67,260 | (61,352 | ) | 97,183 | ||||||||||||||
- | 838,915 | 125,658 | (61,352 | ) | 903,221 | |||||||||||||||
Costs
and expenses:
|
||||||||||||||||||||
Cost
of sales
|
- | 633,618 | 50,453 | - | 684,071 | |||||||||||||||
General
and administrative
|
5 | 156,069 | 2,188 | (61,352 | ) | 96,910 | ||||||||||||||
Depreciation
and amortization
|
1,153 | 39,207 | 6,580 | - | 46,940 | |||||||||||||||
Impairment
of long-lived assets
|
- | 15,528 | - | - | 15,528 | |||||||||||||||
Facilities
relocation and restructuring
|
1,325 | - | 400 | - | 1,725 | |||||||||||||||
Other
operating expense (income), net
|
- | 1,905 | (2,390 | ) | - | (485 | ) | |||||||||||||
2,483 | 846,327 | 57,231 | (61,352 | ) | 844,689 | |||||||||||||||
Operating
(loss) profit
|
(2,483 | ) | (7,412 | ) | 68,427 | - | 58,532 | |||||||||||||
Interest
(expense) income, net
|
(14,891 | ) | (21,072 | ) | 64 | - | (35,899 | ) | ||||||||||||
Other
income (expense), net
|
222 | 2,897 | (2,364 | ) | - | 755 | ||||||||||||||
Equity
in income of subsidiaries
|
24,079 | 43,275 | - | (67,354 | ) | - | ||||||||||||||
Income
(loss) before income taxes
|
6,927 | 17,688 | 66,127 | (67,354 | ) | 23,388 | ||||||||||||||
Benefit
from (provision for) income taxes
|
7,293 | 6,391 | (22,852 | ) | - | (9,168 | ) | |||||||||||||
Net
income (loss)
|
$ | 14,220 | $ | 24,079 | $ | 43,275 | $ | (67,354 | ) | $ | 14,220 |
CONDENSED
COMBINING STATEMENT OF OPERATIONS
For
the three months ended September 28, 2008
Guarantor
|
Non-guarantor
|
|||||||||||||||||||
Parent
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Total
|
||||||||||||||||
Revenues:
|
||||||||||||||||||||
Sales
|
$ | - | $ | 287,641 | $ | - | $ | - | $ | 287,641 | ||||||||||
Franchise
revenues
|
- | 22,320 | 410 | - | 22,730 | |||||||||||||||
- | 309,961 | 410 | - | 310,371 | ||||||||||||||||
Costs
and expenses:
|
||||||||||||||||||||
Cost
of sales
|
- | 239,356 | 524 | - | 239,880 | |||||||||||||||
General
and administrative
|
- | 26,166 | 184 | - | 26,350 | |||||||||||||||
Depreciation
and amortization
|
- | 15,872 | 3 | - | 15,875 | |||||||||||||||
Impairment
of long-lived assets
|
- | 4,581 | - | - | 4,581 | |||||||||||||||
Facilities
relocation and restructuring
|
- | (46 | ) | - | - | (46 | ) | |||||||||||||
- | 285,929 | 711 | - | 286,640 | ||||||||||||||||
Operating
profit (loss)
|
- | 24,032 | (301 | ) | - | 23,731 | ||||||||||||||
Interest
expense
|
- | (13,696 | ) | - | - | (13,696 | ) | |||||||||||||
Other
income, net
|
- | 131 | 1 | - | 132 | |||||||||||||||
Equity
in income (loss) of subsidiaries
|
6,369 | (369 | ) | - | (6,000 | ) | - | |||||||||||||
Income
(loss) before income taxes
|
6,369 | 10,098 | (300 | ) | (6,000 | ) | 10,167 | |||||||||||||
(Provision
for) benefit from income taxes
|
- | (3,729 | ) | (69 | ) | - | (3,798 | ) | ||||||||||||
Net
income (loss)
|
$ | 6,369 | $ | 6,369 | $ | (369 | ) | $ | (6,000 | ) | $ | 6,369 |
20
WENDY’S/ARBY’S
RESTAURANTS, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED COMBINED FINANCIAL STATEMENTS
(In
Thousands)
CONDENSED
COMBINING STATEMENT OF OPERATIONS
For
the nine months ended September 27, 2009
Guarantor
|
Non-guarantor
|
|||||||||||||||||||
Parent
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Total
|
||||||||||||||||
Revenues:
|
||||||||||||||||||||
Sales
|
$ | - | $ | 2,239,605 | $ | 155,871 | $ | - | $ | 2,395,476 | ||||||||||
Franchise
revenues
|
- | 269,437 | 194,998 | (180,019 | ) | 284,416 | ||||||||||||||
- | 2,509,042 | 350,869 | (180,019 | ) | 2,679,892 | |||||||||||||||
Costs
and expenses:
|
||||||||||||||||||||
Cost
of sales
|
- | 1,909,520 | 136,955 | - | 2,046,475 | |||||||||||||||
General
and administrative
|
- | 482,410 | 7,582 | (180,019 | ) | 309,973 | ||||||||||||||
Depreciation
and amortization
|
2,779 | 120,097 | 19,123 | - | 141,999 | |||||||||||||||
Impairment
of long-lived assets
|
- | 28,932 | - | - | 28,932 | |||||||||||||||
Facilities
relocation and restructuring
|
3,297 | 2,138 | 457 | - | 5,892 | |||||||||||||||
Other
operating expense (income), net
|
- | 6,957 | (5,711 | ) | - | 1,246 | ||||||||||||||
6,076 | 2,550,054 | 158,406 | (180,019 | ) | 2,534,517 | |||||||||||||||
Operating
(loss) profit
|
(6,076 | ) | (41,012 | ) | 192,463 | - | 145,375 | |||||||||||||
Interest
expense
|
(15,907 | ) | (72,305 | ) | (50 | ) | - | (88,262 | ) | |||||||||||
Other
income (expense), net
|
123 | (1,457 | ) | (2,632 | ) | - | (3,966 | ) | ||||||||||||
Equity
in income of subsidiaries
|
46,592 | 124,456 | - | (171,048 | ) | - | ||||||||||||||
Income
(loss) before income taxes
|
24,732 | 9,682 | 189,781 | (171,048 | ) | 53,147 | ||||||||||||||
Benefit
from (provision for) income taxes
|
7,663 | 36,910 | (65,325 | ) | - | (20,752 | ) | |||||||||||||
Net
income (loss)
|
$ | 32,395 | $ | 46,592 | $ | 124,456 | $ | (171,048 | ) | $ | 32,395 |
CONDENSED
COMBINING STATEMENT OF OPERATIONS
For
the nine months ended September 28, 2008
Guarantor
|
Non-guarantor
|
|||||||||||||||||||
Parent
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Total
|
||||||||||||||||
Revenues:
|
||||||||||||||||||||
Sales
|
$ | - | $ | 860,560 | $ | - | $ | - | $ | 860,560 | ||||||||||
Franchise
revenues
|
- | 62,848 | 2,831 | - | 65,679 | |||||||||||||||
- | 923,408 | 2,831 | 926,239 | |||||||||||||||||
Costs
and expenses:
|
||||||||||||||||||||
Cost
of sales
|
- | 719,289 | (972 | ) | - | 718,317 | ||||||||||||||
General
and administrative
|
- | 98,591 | (583 | ) | - | 98,008 | ||||||||||||||
Depreciation
and amortization
|
- | 45,964 | 14 | - | 45,978 | |||||||||||||||
Impairment
of long-lived assets
|
- | 5,998 | - | - | 5,998 | |||||||||||||||
Facilities
relocation and restructuring
|
- | 81 | - | - | 81 | |||||||||||||||
Other
operating income, net
|
- | (487 | ) | - | - | (487 | ) | |||||||||||||
- | 869,436 | (1,541 | ) | - | 867,895 | |||||||||||||||
Operating
profit
|
- | 53,972 | 4,372 | - | 58,344 | |||||||||||||||
Interest
expense
|
- | (41,512 | ) | - | - | (41,512 | ) | |||||||||||||
Other
income, net
|
- | 584 | 5 | - | 589 | |||||||||||||||
Equity
in income of subsidiaries
|
10,679 | 3,100 | - | (13,779 | ) | - | ||||||||||||||
Income
(loss) before income taxes
|
10,679 | 16,144 | 4,377 | (13,779 | ) | 17,421 | ||||||||||||||
Provision
for income taxes
|
- | (5,465 | ) | (1,277 | ) | - | (6,742 | ) | ||||||||||||
Net
income (loss)
|
$ | 10,679 | $ | 10,679 | $ | 3,100 | $ | (13,779 | ) | $ | 10,679 |
21
WENDY’S/ARBY’S
RESTAURANTS, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED COMBINED FINANCIAL STATEMENTS
(In
Thousands)
CONDENSED
COMBINING STATEMENT OF CASH FLOWS
For
the nine months ended September 27, 2009
Guarantor
|
Non-guarantor
|
|||||||||||||||||||
Parent
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Total
|
||||||||||||||||
Cash
flows from operating activities:
|
||||||||||||||||||||
Net
income (loss)
|
$ | 32,395 | $ | 46,592 | $ | 124,456 | $ | (171,048 | ) | $ | 32,395 | |||||||||
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||||||||||||||
Equity
in income from operations of intercompany subsidiaries
|
(46,592 | ) | (124,456 | ) | - | 171,048 | - | |||||||||||||
Depreciation
and amortization
|
2,779 | 120,097 | 19,123 | - | 141,999 | |||||||||||||||
Impairment
of long-lived assets
|
- | 28,932 | - | - | 28,932 | |||||||||||||||
Other
operating transactions with affiliates
|
3,157 | 44,420 | (30,934 | ) | - | 16,643 | ||||||||||||||
Write-off
and amortization of deferred financing costs
|
774 | 13,108 | - | - | 13,882 | |||||||||||||||
Net
receipt of deferred vendor incentive
|
- | 13,051 | (35 | ) | - | 13,016 | ||||||||||||||
Share-based
compensation provision
|
2,194 | 7,934 | - | - | 10,128 | |||||||||||||||
Non-cash
rent expense
|
- | 9,847 | 60 | - | 9,907 | |||||||||||||||
Distributions
received from joint venture
|
- | - | 7,106 | - | 7,106 | |||||||||||||||
Deferred
income tax benefit (provision), net
|
27,937 | (55,155 | ) | 255 | - | (26,963 | ) | |||||||||||||
Other,
net
|
89 | 12,643 | (10,094 | ) | - | 2,638 | ||||||||||||||
Changes
in operating assets and liabilities, net
|
(16,724 | ) | (6,339 | ) | 49,813 | - | 26,750 | |||||||||||||
Net
cash provided by operating activities
|
6,009 | 110,674 | 159,750 | - | 276,433 | |||||||||||||||
Cash
flows from investing activities:
|
||||||||||||||||||||
Capital
expenditures
|
(12,006 | ) | (51,181 | ) | (2,093 | ) | - | (65,280 | ) | |||||||||||
Proceeds
from dispositions
|
- | 9,131 | 255 | - | 9,386 | |||||||||||||||
Cost
of acquisitions, less cash acquired
|
- | (664 | ) | - | - | (664 | ) | |||||||||||||
Other,
net
|
- | 2,968 | - | - | 2,968 | |||||||||||||||
Net
cash used in investing activities
|
(12,006 | ) | (39,746 | ) | (1,838 | ) | - | (53,590 | ) | |||||||||||
Cash
flows from financing activities:
|
||||||||||||||||||||
Proceeds
from long-term debt
|
551,061 | 4,945 | - | - | 556,006 | |||||||||||||||
Repayments
of long-term debt
|
- | (153,588 | ) | (166 | ) | - | (153,754 | ) | ||||||||||||
Other
financing transactions with affiliates
|
(132,498 | ) | 278,083 | (145,585 | ) | - | - | |||||||||||||
Deferred
financing costs
|
(20,856 | ) | (17,120 | ) | - | - | (37,976 | ) | ||||||||||||
Dividends
paid to Wendy’s/Arby’s
|
(27,417 | ) | (7,583 | ) | - | - | (35,000 | ) | ||||||||||||
Net
cash provided by (used in) financing activities
|
370,290 | 104,737 | (145,751 | ) | - | 329,276 | ||||||||||||||
Net
cash provided by operations before effect of exchange rate changes on
cash
|
364,293 | 175,665 | 12,161 | - | 552,119 | |||||||||||||||
Effect
of exchange rate changes on cash
|
- | - | 1,671 | - | 1,671 | |||||||||||||||
Net
increase in cash and cash equivalents
|
364,293 | 175,665 | 13,832 | - | 553,790 | |||||||||||||||
Cash
and cash equivalents at beginning of period
|
- | 53,982 | 9,098 | - | 63,080 | |||||||||||||||
Cash
and cash equivalents at end of period
|
$ | 364,293 | $ | 229,647 | $ | 22,930 | $ | - | $ | 616,870 |
22
WENDY’S/ARBY’S
RESTAURANTS, LLC AND SUBSIDIARIES
NOTES
TO CONDENSED COMBINED FINANCIAL STATEMENTS
(In
Thousands)
CONDENSED
COMBINING STATEMENT OF CASH FLOWS
For
the nine months ended September 28, 2008
Guarantor
|
Non-guarantor
|
|||||||||||||||||||
Parent
|
Subsidiaries
|
Subsidiaries
|
Eliminations
|
Total
|
||||||||||||||||
Cash
flows from operating activities:
|
||||||||||||||||||||
Net
income (loss)
|
$ | 10,679 | $ | 10,679 | $ | 3,100 | $ | (13,779 | ) | $ | 10,679 | |||||||||
Adjustments
to reconcile net (loss) income to net cash provided by
operating activities:
|
||||||||||||||||||||
Equity
in income from operations of intercompany subsidiaries
|
(10,679 | ) | (3,100 | ) | - | 13,779 | - | |||||||||||||
Depreciation
and amortization
|
- | 45,964 | 14 | - | 45,978 | |||||||||||||||
Impairment
of long-lived assets
|
- | 5,997 | - | - | 5,997 | |||||||||||||||
Other
operating transactions with affiliates
|
- | (5,844 | ) | (4,520 | ) | - | (10,364 | ) | ||||||||||||
Write-off
and amortization of deferred financing costs
|
- | 2,155 | - | - | 2,155 | |||||||||||||||
Net
receipt of deferred vendor incentive
|
- | 3,743 | - | - | 3,743 | |||||||||||||||
Share-based
compensation provision
|
- | 3,666 | - | - | 3,666 | |||||||||||||||
Non-cash
rent income
|
- | (139 | ) | - | - | (139 | ) | |||||||||||||
Deferred
income tax benefit, net
|
- | 5,985 | - | - | 5,985 | |||||||||||||||
Other,
net
|
- | 10 | (404 | ) | - | (394 | ) | |||||||||||||
Changes
in operating assets and liabilities, net:
|
(7,969 | ) | 848 | - | (7,121 | ) | ||||||||||||||
Net
cash provided by (used in) operating activities
|
- | 61,147 | (962 | ) | - | 60,185 | ||||||||||||||
Cash
flows from investing activities:
|
||||||||||||||||||||
Capital
expenditures
|
- | (58,401 | ) | - | - | (58,401 | ) | |||||||||||||
Proceeds
from dispositions
|
- | 690 | - | - | 690 | |||||||||||||||
Cost
of acquisitions, less cash acquired
|
- | (9,540 | ) | - | - | (9,540 | ) | |||||||||||||
Other,
net
|
- | (391 | ) | - | - | (391 | ) | |||||||||||||
Net
cash used in investing activities
|
- | (67,642 | ) | - | - | (67,642 | ) | |||||||||||||
Cash
flows from financing activities:
|
||||||||||||||||||||
Proceeds
from long-term debt
|
- | 33,668 | - | - | 33,668 | |||||||||||||||
Repayments
of long-term debt
|
- | (87,162 | ) | - | - | (87,162 | ) | |||||||||||||
Capital
contribution from Wendy’s/Arby’s
|
- | 35,146 | - | - | 35,146 | |||||||||||||||
Net
cash used in financing activities
|
- | (18,348 | ) | - | - | (18,348 | ) | |||||||||||||
Net
cash used in operations
|
- | (24,843 | ) | (962 | ) | - | (25,805 | ) | ||||||||||||
Net
decrease in cash and cash equivalents
|
- | (24,843 | ) | (962 | ) | - | (25,805 | ) | ||||||||||||
Cash
and cash equivalents at beginning of period
|
- | 40,510 | 3,546 | - | 44,056 | |||||||||||||||
Cash
and cash equivalents at end of period
|
$ | - | $ | 15,667 | $ | 2,584 | $ | - | $ | 18,251 |
23
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
This
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of Wendy’s/Arby’s Restaurants, LLC (“Wendy’s/Arby’s Restaurants”,
the “Company” or “we” or “our”) should be read in conjunction with our
accompanying unaudited combined financial statements included elsewhere herein
and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in our Registration Statement on Form S-4 filed with the
U.S. Securities and Exchange Commission (the “SEC”) on August 28,2009
(registration number 333-161613), as amended by amendments to the Form S-4 filed
on October 6, October 27 and November 5, 2009 (the “Form S-4”). There
have been no significant changes as of September 27, 2009 to the application of
our critical accounting policies, contractual obligations (except as described
below) or guarantees and commitments as described in “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” of our Form S-4.
Certain statements we make under this Item 2 constitute “forward-looking
statements” under the Private Securities Litigation Reform Act of 1995. See
“Special Note Regarding Forward-Looking Statements and Projections” in “Part II
– Other Information” preceding “Item 1.” You should consider our forward-looking
statements in light of our unaudited condensed combined financial statements,
related notes, and other financial information appearing elsewhere in this
report, our Form S-4 and our other filings with the SEC.
Wendy’s/Arby’s
Restaurants was formed by Wendy’s/Arby’s Group, Inc. (“Wendy’s/Arby’s”) as a
wholly-owned subsidiary holding company in October
2008. Wendy’s/Arby’s Restaurants’ sole asset at formation consisted
of the contribution by Wendy’s/Arby’s of its investment in Wendy’s
International, Inc. and subsidiaries (“Wendy’s”). All of the outstanding common
stock of Wendy’s was acquired by Triarc Companies, Inc. (“Triarc”) on September
29, 2008 and at that same time Triarc changed its name to Wendy’s/Arby’s Group,
Inc. In March 2009, Wendy’s/Arby’s contributed its longstanding investment in
Arby’s Restaurant Group, Inc. and subsidiaries (“ARG” or “Arby’s”) to
Wendy’s/Arby’s Restaurants. Wendy’s/Arby’s Restaurants has no assets or
operations other than those of Wendy’s and Arby’s and their respective
subsidiaries.
The
combined financial statements present the historical results of Arby’s and
Wendy’s as if Wendy’s/Arby’s Restaurants had existed as a separate legal entity
by the beginning of the earliest period presented. The combined financial
statements have been derived from the consolidated financial statements and
historical accounting records of Wendy’s/Arby’s. Accordingly, the
combined financial statements include the results of Arby’s and Wendy’s
beginning from their time of ownership by Wendy’s/Arby’s. As a result, financial
results for periods prior to September 29, 2008 include solely the financial
results of Arby’s.
The
results of operations discussed below will not be indicative of future results
due to the consummation of the merger transaction with Wendy’s, which occurred
on September 29, 2008, the first day of the fourth fiscal quarter of
2008.
Introduction
and Executive Overview
Our
Business
We are a
wholly owned subsidiary of Wendy’s/Arby’s and the parent company of Wendy’s and
ARG, which are the owners and franchisors of the Wendy’s® and Arby’s® restaurant
systems, respectively. We currently manage and internally report our operations
as two business segments: the operation and franchising of Wendy’s restaurants,
including its wholesale bakery operations, and the operation and franchising of
Arby’s restaurants. As of September 27, 2009, the Wendy’s restaurant system was
comprised of 6,608 restaurants, of which 1,395 were owned and operated by the
Company. As of September 27, 2009, the Arby’s restaurant system was comprised of
3,739 restaurants, of which 1,165 were owned and operated by the Company. All
2,560 Wendy’s and Arby’s Company-owned restaurants are located principally in
the United States and to a lesser extent in Canada (the “North America
Restaurants”).
Restaurant business revenues for the
2009 first nine months include: (1) $2,314.2 million of revenues from
Company-owned restaurants, (2) $81.3 million from the sale of bakery items and
kid’s meal promotion items to our franchisees and others, (3) $263.1 million
from royalty income from franchisees and (4) $21.3 million of other franchise
related revenue. Our revenues increased significantly in the 2009 first nine
months due to the Wendy’s Merger. The Wendy’s royalty rate was 4.0% for the nine
months ended September 27, 2009. While approximately 80% of our existing Arby’s
royalty agreements and substantially all of our new domestic royalty agreements
provide for royalties of 4.0% of franchise revenues, our average Arby’s royalty
rate was 3.6% for the nine months ended September 27, 2009.
24
Our
restaurant businesses have recently experienced trends in the following
areas:
Revenues
|
·
|
Industry-wide
declines in same-store sales of all segments of the restaurant industry,
including quick service restaurants
(“QSR”).
|
|
·
|
Continued
lack of general consumer confidence in the economy and the effect of
decreases in many consumers’ discretionary income caused by factors such
as (1) volatility in the financial markets and recessionary economic
conditions, including high unemployment levels, (2) a significant decline
in the real estate market, although that market has shown some improvement
in recent months, (3) fluctuations in fuel costs, with some stabilization
in recent months and (4) moderate food cost inflation through the first
half of 2009 followed by decreases in most commodity
costs;
|
|
·
|
Continued
and increasingly aggressive price competition in the QSR industry, as
evidenced by (1) value menu concepts, which offer comparatively lower
prices on some menu items, (2) the use of coupons and other price
discounting, (3) product promotions focused on lower prices of certain
menu items, including signature items, and (4) combination meal concepts,
which offer a complete meal at an aggregate price lower than the price of
individual food and beverage items;
|
|
·
|
Competitive
pressures due to extended hours of operation by many QSR competitors,
including breakfast and late night
hours;
|
|
·
|
Competitive
pressures from operators outside the QSR industry, such as the deli
sections and in-store cafes of major grocery and other retail store
chains, convenience stores and casual dining outlets offering take-out
food;
|
|
·
|
Increased
availability to consumers of product choices, including (1) healthy
products driven by a greater consumer awareness of nutritional issues, (2)
products that tend to offer a variety of portion sizes and different types
of ingredients; (3) beverage programs which offer a wider selection of
premium non-carbonated beverages, including coffee and tea products; and
(4) sandwiches with perceived higher levels of freshness, quality and
customization; and
|
|
·
|
Competitive
pressures from an increasing number of franchise opportunities seeking to
attract qualified franchisees.
|
Cost of
Sales
|
·
|
Decreasing
commodity prices which have reduced our food costs in the second half of
2009;
|
|
·
|
Relatively
stabilized fuel costs, in recent months, which have contributed to
decreases in utility, distribution and freight
costs;
|
|
·
|
Federal,
state and local legislative activity, such as minimum wage increases and
mandated health and welfare benefits which is expected to continue to
increase wages and related fringe benefits, including health care and
other insurance costs; and
|
|
·
|
Legal
or regulatory activity related to nutritional content or menu labeling
which results in increased operating
costs.
|
|
Other
|
|
·
|
A
significant portion of both our Wendy’s and Arby’s restaurants are
franchised and, as a result, we receive revenue in the form of royalties
(which are generally based on a percentage of sales at franchised
restaurants), rent and other fees from franchisees. Arby’s franchisee
related accounts receivable and estimated reserves for uncollectibility
have increased, and may continue to increase, as a result of the
deteriorating financial condition of some of our franchisees. The
deteriorating financial condition of these franchisees also affects their
ability to make required contributions to national and local advertising
programs;
|
|
·
|
Weakness
in the overall credit markets, including higher borrowing costs in the
lending markets typically used to finance new unit development and
remodels. These tightened credit conditions and economic pressures are
negatively impacting franchisees, including the ability of some
franchisees to meet their commitments under development, rental and
franchise license agreements; and
|
|
·
|
Continued
competition for development sites among QSR competitors and other
businesses.
|
We
experience these trends directly to the extent they affect the operations of our
Company-owned restaurants and indirectly to the extent they affect sales by our
franchisees and, accordingly, the royalties and franchise fees we receive from
them.
25
Business
Highlights
We
believe there are significant opportunities to grow our business, strengthen our
competitive position and enhance our profitability through the execution of the
following strategies:
·
|
Revitalizing
the Wendy’s and Arby’s brands by creating innovative new menu items,
expanding our breakfast daypart at Wendy’s, increasing Arby’s customer
traffic by targeting our “medium Arby’s customers” and improving
affordability at Arby’s by expanding everyday value menu
items;
|
·
|
Continued
improvement in Wendy’s Company-owned restaurant
profitability;
|
·
|
Realizing
cost savings related to the Wendy’s/Arby’s
integration;
|
·
|
Strategically
growing our franchise base by leveraging our brands to expand in North
America as well as into new international markets with dual branded
Wendy’s and Arby’s franchised restaurants;
and
|
·
|
Acquisitions
of other restaurant
companies.
|
Key
Business Measures
We track
our results of operations and manage our business using the following key
business measures:
|
·
|
Same-Store
Sales
|
We report
Arby’s North America Restaurants same-store sales commencing after a store has
been open for fifteen continuous months. Wendy’s North America Restaurants
same-store sales are reported after a store has been open for at least fifteen
continuous months as of the beginning of the fiscal year. These methodologies
are consistent with the metrics used by our management for internal reporting
and analysis. Same-store sales exclude the impact of currency
translation.
|
·
|
Restaurant
Margin
|
We define
restaurant margin as sales from Company-owned restaurants (excluding sales of
bakery items and kid’s meal promotion items to franchisees) less cost of sales
(excluding costs of bakery items and kid’s meal promotion items), divided by
sales from Company-owned restaurants (excluding sales of bakery items and kid’s
meal promotion items to franchisees). Restaurant margin is influenced by factors
such as restaurant openings and closures, price increases, the effectiveness of
our advertising and marketing initiatives, featured products, product mix, the
level of our fixed and semi-variable costs, and fluctuations in food and labor
costs.
Merger
with Wendy’s International, Inc.
On
September 29, 2008, a subsidiary of Triarc merged with and into Wendy’s (the
“Wendy’s Merger”) and Wendy’s became a wholly owned subsidiary of Triarc in an
all-stock transaction in which Wendy’s shareholders received a fixed ratio
of 4.25 shares of Wendy’s/Arby’s common stock for each share of
Wendy’s common stock owned. Our consolidated results of operations commencing
September 29, 2008 include Wendy’s results of operations.
Senior
Notes
On June
23, 2009, we issued $565.0 million principal amount of Senior Notes (the “Senior
Notes”). The Senior Notes will mature on July 15, 2016 and accrue interest at
10.00% per annum, payable semi-annually on January 15 and July 15, with the
first payment on January 15, 2010. The Senior Notes were issued at 97.533% of
the principal amount, representing a yield to maturity of 10.50% and resulting
in net proceeds paid to us of $551.1 million. The $13.9 million discount is
being accreted and the related charge included in interest expense until the
Senior Notes mature. The Senior Notes are fully and unconditionally guaranteed,
jointly and severally, on an unsecured basis by certain direct and indirect
domestic subsidiaries of Wendy’s/Arby’s Restaurants (collectively, the
“Guarantors”).
On
November 9, 2009, Wendy's/Arby's Restaurants commenced an exchange offer for the
initial notes (the “Initial Notes”) issued on June 23, 2009 pursuant to a
registration rights agreement entered into in connection with the issuance of
the Initial Notes. In the exchange offer, Wendy’s/Arby’s Restaurants
is offering to exchange its outstanding $565.0 million aggregate principal
amount of Initial Notes for a like aggregate amount of its 10.00% Senior Notes
due 2016 registered under the Securities Act of 1933 (the “Exchange
Notes”). The Exchange Notes issued in the exchange offer will
have substantially similar terms as the Initial Notes, except that the Exchange
Notes will have no transfer restrictions or registration rights. The
expiration date of the exchange offer is December 9, 2009, unless extended by
Wendy’s/Arby’s Restaurants.
26
Related
Party Transactions
We have not entered into any
transactions with related parties since the beginning of our third quarter
except for the following agreement:
Supply
Chain Relationship Agreement
During
the 2009 fourth quarter, Wendy’s and its franchisees entered into a purchasing
co-op (the “Co-op”) relationship agreement (the “Co-op Agreement”). The Co-op
will manage food and related product purchases and distribution services for the
Wendy’s system in the United States and Canada. The Co-op’s supply chain
management will ensure continuity of supply and provide consolidated purchasing
efficiencies while monitoring possible obsolete inventory. The system’s current
purchasing function is being performed and paid for by Wendy’s. In
order to facilitate the orderly transition of the current purchasing function,
Wendy’s will transfer certain contracts and certain current Wendy’s purchasing
employees to the Co-op in January 2010. Pursuant to the terms of the
Co-op Agreement, Wendy’s is required to pay $15.5 million to the Co-op over an
18 month period in order to provide funding for start-up costs and cash
reserves, as well as pay for services provided by the Co-op. Future operations
of the Co-op will be paid by all members of the Co-op. The Co-op, as an
independent organization, is not expected to be consolidated with the Company’s
financial statements. Wendy’s expects to expense all required payments under the
Co-op Agreement in the fourth quarter of 2009.
27
Presentation
of Financial Information
We report
on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to
December 31. All quarters presented contain 13 weeks. Because our 2009 fiscal
year ending on January 3, 2010 will contain 53 weeks, our fourth quarter of 2009
will contain 14 weeks. All references to years and quarters relate to fiscal
periods rather than calendar periods.
Results
of Operations
Three
Months Ended September 27, 2009 Compared with Three Months Ended September 28,
2008
Three
Months Ended
|
||||||||||||
September
27, 2009
|
September
28, 2008
|
Total
Change
|
||||||||||
(In
Millions)
|
||||||||||||
Revenues:
|
||||||||||||
Sales
|
$ | 806.1 | $ | 287.6 | $ | 518.5 | ||||||
Franchise
revenues
|
97.1 | 22.8 | 74.3 | |||||||||
903.2 | 310.4 | 592.8 | ||||||||||
Costs
and expenses:
|
||||||||||||
Cost
of sales
|
684.1 | 239.9 | 444.2 | |||||||||
General
and administrative
|
96.9 | 26.3 | 70.6 | |||||||||
Depreciation
and amortization
|
46.9 | 15.9 | 31.0 | |||||||||
Impairment
of long-lived assets
|
15.5 | 4.6 | 10.9 | |||||||||
Facilities
relocation and restructuring
|
1.7 | - | 1.7 | |||||||||
Other
operating income, net
|
(0.4 | ) | - | (0.4 | ) | |||||||
844.7 | 286.7 | 558.0 | ||||||||||
Operating
profit
|
58.5 | 23.7 | 34.8 | |||||||||
Interest
expense
|
(35.9 | ) | (13.7 | ) | (22.2 | ) | ||||||
Other
income, net
|
0.8 | 0.2 | 0.6 | |||||||||
Income
(loss) before income taxes
|
23.4 | 10.2 | 13.2 | |||||||||
Provision
for income taxes
|
(9.2 | ) | (3.8 | ) | (5.4 | ) | ||||||
Net
income (loss)
|
$ | 14.2 | $ | 6.4 | $ | 7.8 |
28
Restaurant
statistics:
|
|||||
Wendy’s
same-store sales:
|
Third
Quarter 2009
|
||||
North
America Company-owned restaurants
|
(1.4)%
|
||||
North
America franchised restaurants
|
0.4%
|
||||
North
America systemwide
|
(0.1)%
|
||||
Arby’s
same-store sales:
|
Third
Quarter 2009
|
Third
Quarter 2008
|
|||
North
America Company-owned restaurants
|
(6.5)%
|
(7.2)%
|
|||
North
America franchised restaurants
|
(10.2)%
|
(4.3)%
|
|||
North
America systemwide
|
(9.0)%
|
(5.1)%
|
|||
Restaurant
margin:
|
|||||
Third
Quarter 2009
|
|||||
Wendy’s
|
16.5%
|
||||
Third
Quarter 2009
|
Third
Quarter 2008
|
||||
Arby’s
|
12.1%
|
16.6%
|
|||
Restaurant
count:
|
Company-owned
|
Franchised
|
Systemwide
|
||
Wendy’s
restaurant count:
|
|||||
Restaurant
count at June 28, 2009
|
1,395
|
5,213
|
6,608
|
||
Opened
|
1
|
13
|
14
|
||
Closed
|
(1)
|
(13)
|
(14)
|
||
Restaurant
count at September 27, 2009
|
1,395
|
5,213
|
6,608
|
||
Arby’s
restaurant count:
|
|||||
Restaurant
count at June 28, 2009
|
1,170
|
2,575
|
3,745
|
||
Opened
|
2
|
12
|
14
|
||
Closed
|
(7)
|
(13)
|
(20)
|
||
Restaurant
count at September 27, 2009
|
1,165
|
2,574
|
3,739
|
||
Total
Wendy’s/Arby’s restaurant count at September 27, 2009
|
2,560
|
7,787
|
10,347
|
Sales
Our
sales, which were generated primarily from our Company-owned restaurants,
increased $518.5 million to $806.1 million for the three months ended September
27, 2009 from $287.6 million for the three months ended September 28, 2008. The
increase in sales was due to the Wendy’s Merger which added 1,395 Company-owned
restaurants as of September 27, 2009 that generated $536.8 million in sales
during the 2009 third quarter. Wendy’s North America Company-owned same-store
sales, excluding the impact of fewer restaurants serving breakfast in the third
quarter of 2009 as compared to the third quarter of 2008, would have increased
approximately 0.1%. Excluding the effect of the Wendy’s Merger, sales decreased
$18.3 million, which is attributable to the 6.5% decrease in same-store sales of
our Arby’s North America Company-owned restaurants stemming from lower customer
traffic primarily impacted by (1) the previously described industry-wide
restaurant trends, negative economic trends and competitive pressures in
“Introduction and Executive Overview – Our Business” and (2) a decrease in the
number of national advertising campaigns. These negative factors were partially
offset by aggressive Arby’s promotions which had a positive impact on same-store
sales during the 2009 third quarter as compared to the 2008 third
quarter.
29
Franchise
Revenues
Total
franchise revenues, which were generated entirely from franchised restaurants,
increased $74.3 million to $97.1 million for the three months ended September
27, 2009 from $22.8 million for the three months ended September 28, 2008. The
increase in franchise revenue was due to the Wendy’s Merger which added 5,213
franchise restaurants as of September 27, 2009 to the Wendy’s/Arby’s restaurant
system that generated $76.7 million in franchise revenue during the 2009 third
quarter. Wendy’s franchise store sales were not significantly impacted by
changes in the number of restaurants serving breakfast in the third quarter of
2009. Excluding the effect of the Wendy’s Merger, franchise revenues decreased
$2.4 million, which is attributable to the 10.2% decrease in same-store sales
for Arby’s North America franchised restaurants. Same-store sales of our Arby’s
North America franchise restaurants decreased primarily due to the same factors
discussed above under “Sales.” In addition, franchise restaurants were
negatively affected by the impact of (1) less aggressive promotions in the third
quarter of 2009 than at Company-owned restaurants and (2) less national media
advertising, which had a greater negative impact than on Company-owned
restaurants as certain franchise markets do not participate in local
advertising.
Restaurant
Margin
Our
consolidated restaurant margin decreased to 15.0% for the three months ended
September 27, 2009 from the Arby’s 16.6% for the three months ended September
28, 2008. The 2009 third quarter restaurant margin reflects the mix of the
Wendy’s restaurant margin of 16.5% and the Arby’s restaurant margin of 12.1%.
Wendy’s restaurant margin for the third quarter of 2008 was 12.5%. The increase
in the Wendy’s margin is primarily attributable to improvements in commodity
costs and in certain controllable costs, primarily due to operational
initiatives, combined with price increases in the latter part of the 2008 third
quarter. The decrease in the Arby’s margin was primarily attributable to (1) the
effect of the decrease in Arby’s same-store sales without comparable reductions
in fixed and semi-variable costs and (2) the targeted product discounting of
selected Arby’s menu items. These negative factors were partially offset by
improvements in the cost of commodities.
General
and Administrative
Our
general and administrative expenses increased $70.6 million to $96.9 million for
the three months ended September 27, 2009 from $26.3 million for the three
months ended September 28, 2008. The increase was primarily due to
the Wendy’s Merger which added $52.7 million of Wendy’s-related general and
administrative expenses. Excluding these Wendy’s-related expenses, our general
and administrative expenses increased $17.9 million principally due to (1) $4.9
million of management fee income from Wendy’s/Arby’s in the prior year that did
not recur in the same period in the current year, (2) $3.3 million of
integration costs related to the Wendy’s Merger, (3) a $2.8 million increase in
certain incentive compensation accruals due to stronger consolidated performance
as compared to plan in the 2009 third quarter compared to weaker consolidated
performance compared to plan in the 2008 third quarter, (4) a $2.3 million
increase in salaries and wages due to staffing and other expenses associated
with the establishment of the shared services center in Atlanta, Georgia and (5)
a $1.5 million increase in the allowance for doubtful accounts primarily
associated with the collection of Arby’s franchise receivables.
Depreciation
and Amortization
Three
Months Ended
|
||||||||
September
27, 2009
|
September
28, 2008
|
|||||||
(In
Millions)
|
||||||||
Arby’s
restaurants, primarily properties
|
$ | 14.3 | $ | 15.9 | ||||
Wendy’s
restaurants, primarily properties
|
31.4 | - | ||||||
Shared
services center assets
|
1.2 | |||||||
$ | 46.9 | $ | 15.9 |
30
Impairment
of Long Lived Assets
Three
Months Ended
|
||||||||
September
27, 2009
|
September
28, 2008
|
|||||||
(In
Millions)
|
||||||||
Arby’s
restaurants, primarily properties at underperforming
locations
|
$ | 15.2 | $ | 4.6 | ||||
Wendy’s
restaurants
|
0.3 | - | ||||||
$ | 15.5 | $ | 4.6 |
Facilities
Relocation and Restructuring
The
expense for the three months ended September 27, 2009 represents Wendy’s
merger-related severance costs incurred in the 2009 third quarter.
Interest
Expense
Three
Months Ended
|
||||||||
September
27, 2009
|
September
28, 2008
|
|||||||
(In
Millions)
|
||||||||
Senior
Notes
|
$ | 14.9 | $ | - | ||||
Wendy’s
debt
|
10.1 | - | ||||||
Senior
secured term loan
|
4.6 | 6.7 | ||||||
Arby’s
debt
|
5.0 | 6.1 | ||||||
Amortization
of financing costs on senior secured term loan
|
1.3 | 0.9 | ||||||
$ | 35.9 | $ | 13.7 |
Interest
expense increased $22.2 million principally reflecting (1) $14.9 million of
interest on the Senior Notes issued in June 2009 discussed below under
“Liquidity and Capital Resources – Senior Notes” and (2) $10.1 million of net
interest on Wendy’s debt assumed as a result of the Wendy’s Merger, which
includes a $1.0 million favorable impact from our interest rate swap agreements
discussed below under “Liquidity and Capital Resources – Derivatives.” These
increases were partially offset by a net decrease in the senior secured term
loan interest expense of $2.1 million primarily due to a decrease in the
outstanding related debt resulting from the $232.5 million of prepayments since
the end of the third quarter of 2008 as offset by an increase in the related
interest rate.
Provision
for Income Taxes
The
effective tax rates for the third quarter of 2009 and 2008 were 39.2% and 37.4%,
respectively. The effective tax rates differ due to the relative impact of
changes in the estimated full year tax rates and changes in uncertain tax
positions, as well as the effect of 2009 adjustments related to prior year tax
matters.
31
Nine
Months Ended September 27, 2009 Compared with Nine Months Ended September 28,
2008
Nine
Months Ended
|
|||||||||||||
September
27,
2009
|
September
28,
2008
|
Total
Change
|
|||||||||||
(In
Millions)
|
|||||||||||||
Revenues:
|
|||||||||||||
Sales
|
$ | 2,395.5 | $ | 860.5 | $ | 1,535.0 | |||||||
Franchise
revenues
|
284.4 | 65.7 | 218.7 | ||||||||||
2,679.9 | 926.2 | 1,753.7 | |||||||||||
Costs
and expenses:
|
|||||||||||||
Cost
of sales
|
2,046.5 | 718.3 | 1,328.2 | ||||||||||
General
and administrative
|
310.0 | 98.0 | 212.0 | ||||||||||
Depreciation
and amortization
|
142.0 | 46.0 | 96.0 | ||||||||||
Impairment
of long-lived assets
|
28.9 | 6.0 | 22.9 | ||||||||||
Facilities
relocation and restructuring
|
5.9 | 0.1 | 5.8 | ||||||||||
Other
operating expense (income), net
|
1.2 | (0.5 | ) | 1.7 | |||||||||
2,534.5 | 867.9 | 1,666.6 | |||||||||||
Operating
profit
|
145.4 | 58.3 | 87.1 | ||||||||||
Interest
expense
|
(88.3 | ) | (41.5 | ) | (46.8 | ) | |||||||
Other
(expense) income, net
|
(4.0 | ) | 0.6 | (4.6 | ) | ||||||||
Income
(loss) before income taxes
|
53.1 | 17.4 | 35.7 | ||||||||||
Provision
for income taxes
|
(20.7 | ) | (6.7 | ) | (14.0 | ) | |||||||
Net
income
|
$ | 32.4 | $ | 10.7 | $ | 21.7 |
32
Restaurant
statistics:
|
|||||
Wendy’s
same-store sales:
|
2009
First
Nine
Months
|
||||
North
America Company-owned restaurants
|
(0.8)%
|
||||
North
America franchised restaurants
|
0.5%
|
||||
North
America systemwide
|
0.2%
|
||||
Arby’s
same-store sales:
|
2009
First
Nine
Months
|
2008
First
Nine
Months
|
|||
North
America Company-owned restaurants
|
(6.8)%
|
(4.2)%
|
|||
North
America franchised restaurants
|
(8.6)%
|
(2.4)%
|
|||
North
America systemwide
|
(8.0)%
|
(3.0)%
|
|||
Restaurant
margin:
|
|||||
2009
First
Nine
Months
|
|||||
Wendy’s
|
14.6%
|
||||
2009
First
Nine
Months
|
2008
First
Nine
Months
|
||||
Arby’s
|
13.8%
|
16.5%
|
|||
Restaurant
count:
|
Company-owned
|
Franchised
|
Systemwide
|
||
Wendy’s
restaurant count:
|
|||||
Restaurant
count at December 28, 2008
|
1,406
|
5,224
|
6,630
|
||
Opened
|
8
|
32
|
40
|
||
Closed
|
(8)
|
(54)
|
(62)
|
||
Sold
to franchisees, net
|
(11)
|
11
|
-
|
||
Restaurant
count at September 27, 2009
|
1,395
|
5,213
|
6,608
|
||
Arby’s
restaurant count:
|
|||||
Restaurant
count at December 28, 2008
|
1,176
|
2,580
|
3,756
|
||
Opened
|
5
|
46
|
51
|
||
Closed
|
(16)
|
(52)
|
(68)
|
||
Restaurant
count at September 27, 2009
|
1,165
|
2,574
|
3,739
|
||
Total
Wendy’s/Arby’s restaurant count at September 27, 2009
|
2,560
|
7,787
|
10,347
|
Sales
Our
sales, which were generated primarily from our Company-owned restaurants,
increased $1,535.0 million to $2,395.5 million for the nine months ended
September 27, 2009 from $860.5 million for the nine months ended September 28,
2008. The increase in sales was due to the Wendy’s Merger which added 1,395
Company-owned restaurants as of September 27, 2009 that generated $1,582.9
million of sales during the 2009 first nine months. Wendy’s North America
Company-owned same-store sales, excluding the impact of fewer restaurants
serving breakfast in the 2009 first nine months as compared to the 2008 first
nine months, would have increased approximately 0.8%. Excluding the effect of
the Wendy’s Merger, sales decreased $47.9 million,
which is attributable to the 6.8% decrease in same-store sales of our Arby’s
North America Company-owned restaurants, principally due to the same factors
discussed under “Sales” in the three month discussion above.
33
Franchise
Revenues
Total
franchise revenues, which were generated entirely from franchised restaurants,
increased $218.7 million to $284.4 million for the nine months ended September
27, 2009 from $65.7 million for the nine months ended September 28, 2008. The
increase in franchise revenue was due to the Wendy’s Merger which added 5,213
franchise restaurants as of September 27, 2009 to the Wendy’s/Arby’s restaurant
system that generated $224.0 million in franchise revenue during the 2009 first
nine months. Wendy’s franchise same-store sales were not significantly impacted
by changes in the number of restaurants serving breakfast in the 2009 first nine
months. Excluding the effect of the Wendy’s Merger, franchise revenues decreased
$5.3 million, which is attributable to the 8.6% decrease in same-store sales for
Arby’s North America franchised restaurants. Same-store sales of our Arby’s
North America franchised restaurants decreased principally due to the same
factors discussed under “Franchise Revenues” in the three month discussion
above.
Restaurant
Margin
Our
consolidated restaurant margin decreased to 14.3% for the nine months ended
September 27, 2009 from the Arby’s 16.5% restaurant margin for the nine months
ended September 28, 2008. The 2009 first nine months restaurant margin reflects
the mix of the Wendy’s restaurant margin of 14.6% and the Arby’s restaurant
margin of 13.8%. Wendy’s restaurant margin for the 2008 first nine months was
11.6%. The increase in the Wendy’s margin is primarily attributable to the
effect of prior year price increases in the latter part of the 2008 third
quarter and improvements in labor and certain controllable costs, partially due
to operational initiatives, as slightly offset by increases in commodity costs
during the 2009 nine months as compared to the 2008 nine months. The decrease in
the Arby’s margin was primarily attributable to the same factors discussed under
“Restaurant Margin” in the three month discussion.
General
and Administrative
Our
general and administrative expenses increased $212.0 million to $310.0 million
for the nine months ended September 27, 2009 from $98.0 million for the nine
months ended September 28, 2008. This increase was due to the Wendy’s
Merger which added $160.5 million of Wendy’s general and administrative
expenses. In addition, for the 2009 first quarter, Wendy’s/Arby’s Restaurants
was charged $34.1 million of Wendy’s/Arby’s support services costs. Excluding
Wendy’s-related expenses and Wendy’s/Arby’s support services allocations, our
general and administrative expenses increased $17.4 million principally due to
(1) $7.6 million of integration costs related to the Wendy’s Merger, (2) a $5.0
million increase in incentive compensation primarily as a result of better
performance versus plan on a consolidated basis in the 2009 first nine months as
compared to performance versus plan for the same period in the prior year and
(3) a $3.6 million increase in the allowance for doubtful accounts primarily
associated with the collection of Arby’s franchise receivables.
Depreciation
and Amortization
Nine
Months Ended
|
||||||||
September
27, 2009
|
September
28, 2008
|
|||||||
(In
Millions)
|
||||||||
Arby’s
restaurants, primarily properties
|
$ | 42.5 | $ | 46.0 | ||||
Wendy’s
restaurants, primarily properties
|
96.7 | - | ||||||
Shared
services center assets
|
2.8 | - | ||||||
$ | 142.0 | $ | 46.0 |
Impairment
of Long Lived Assets
Nine
Months Ended
|
||||||||
September
27, 2009
|
September
28, 2008
|
|||||||
(In
Millions)
|
||||||||
Arby’s
restaurants, primarily properties at underperforming
locations
|
$ | 27.9 | $ | 6.0 | ||||
Wendy’s
restaurants
|
1.0 | - | ||||||
$ | 28.9 | $ | 6.0 |
34
Facilities
Relocation and Restructuring
The
expense for the nine months ended September 27, 2009 represents Wendy’s
merger-related severance costs incurred in the 2009 first nine
months.
Interest
Expense
Nine
Months Ended
|
||||||||
September
27, 2009
|
September
28, 2008
|
|||||||
(In
Millions)
|
||||||||
Wendy’s
debt
|
$ | 32.9 | $ | - | ||||
Senior
Notes
|
15.9 | - | ||||||
Senior
secured term loan
|
15.2 | 22.8 | ||||||
Amortization
of financing costs on senior secured term loan
|
8.5 | 2.2 | ||||||
Arby’s
debt
|
15.8 | 16.5 | ||||||
$ | 88.3 | $ | 41.5 |
Interest
expense increased $46.8 million principally reflecting (1) $32.9 million of net
interest on Wendy’s debt assumed as a result of the Wendy’s Merger, which
includes a $1.0 million favorable impact from our interest rate swap agreements
discussed below under “Liquidity and Capital Resources – Derivatives,” (2) $15.9
million of interest on the Senior Notes issued in June 2009 as discussed below
under “Liquidity and Capital Resources – Senior Notes” and (3) a $6.3 million
increase in 2009 from the write-off of financing costs related to prepayments on
the senior secured term loan as compared to the same period in 2008 as discussed
below under “Liquidity and Capital Resources – Senior Secured Term Loan.” These
increases were partially offset by a net decrease of approximately $7.6 million
in the senior secured term loan interest expense. The net decrease was the
result of a decrease in interest expense of approximately $15.6 million due to
lower average outstanding debt levels outstanding on the senior secured term
loan partially offset by an increase of approximately $8.0 million due to the
change in interest rate as described in “Liquidity and Capital Resources –
Senior Secured Term Loan.”
Other
(expense) income, net
Nine
Months Ended
|
||||||||
September
27, 2009
|
September
28, 2008
|
|||||||
(In
Millions)
|
||||||||
Write-off
of deferred financing costs
|
$ | (4.3 | ) | $ | - | |||
Other
|
0.3 | 0.6 | ||||||
$ | (4.0 | ) | $ | 0.6 |
Provision
for Income Taxes
The
effective tax rates for the first nine months of 2009 and 2008 were 39.0% and
38.7%, respectively. The effective rate is higher in 2009 principally
as a result of the relative impact of changes in the estimated full year tax
rates as well as the effect of 2009 adjustments related to prior year tax
matters.
35
Outlook
Sales
We
anticipate that certain of the negative factors described above which affected
our 2009 Company-owned same-store sales, including current restaurant
industry-wide sales trends, the uncertain economic environment and competitive
discounting, will continue to negatively impact our customer traffic and sales
for the fourth quarter of 2009. The Wendy’s brand will be negatively impacted by
a reduction in the number of stores serving breakfast while refining this
daypart strategy. For the fourth quarter of 2009, the Arby’s marketing strategy
will begin to emphasize everyday value products. For the fourth quarter of
2009, the net impact of new store openings and closings are not expected to have
a significant impact on consolidated sales.
Franchise
Revenues
We expect
that the same-store sales trends for franchised restaurants at Arby’s and
Wendy’s will continue to be generally impacted by many of the same factors
described above under “Sales.” We anticipate that the Arby’s
franchised restaurants same-store sales may continue to be more negatively
impacted by the reduction in national advertising in the fourth quarter of 2009
as compared to 2008. We do not anticipate the reduction in the number
of stores serving breakfast to have a significant impact on same-store sales of
Wendy’s franchised restaurants in the 2009 fourth quarter.
Restaurant
Margin
We expect
that the factors described above which affected restaurant margin for
Company-owned restaurants for the Wendy’s and Arby’s brands will continue to
impact restaurant margin for the 2009 fourth quarter. The Wendy’s and
Arby’s restaurant margins are expected to be favorably impacted by improvement
in commodity costs in the fourth quarter of 2009 as compared to the fourth
quarter of 2008. We expect that the 2009 fourth quarter restaurant margin at
Company-owned restaurants for the Wendy’s brand will increase compared to the
same period in the prior year primarily as a result of the impact of currently
effective price increases, shifts in product mix and tighter controls on fixed
and semi-variable costs. We expect the Arby’s fourth quarter 2009 margins to
continue to be negatively affected by sales deleveraging.
General
and Administrative
We expect
that our general and administrative expenses for the fourth quarter of 2009 will
increase as compared to the same period in 2008 primarily as a result of (1) the
$15.5 million to be paid to the Co-op as described above in “Introduction and
Executive Overview – Related Party Transactions” and (2) continued charges
related to our allowance for doubtful accounts primarily associated with the
collection of Arby’s franchise receivables. These increases will be partially
offset by merger-related synergies and other cost saving
initiatives.
Depreciation
and Amortization
We expect
that our depreciation and amortization expense for the fourth quarter of 2009
will increase as compared to the same period in 2008 primarily as a result of
(1) an increase in the depreciation run rate of $6.5 million recorded in the
2009 first quarter related to valuation adjustments on long-lived assets from
the Wendy’s Merger completed in the 2008 fourth quarter and (2) an increase in
information technology assets. These increases are expected to be partially
offset by decreases in depreciation and amortization as a result of (1) the
retirement of long-lived assets added as a result of the Wendy’s Merger and (2)
a reduction in depreciation on Arby’s long-lived assets for which we have
recorded impairment charges since the fourth quarter of 2008.
Facilities
Relocation and Restructuring
We expect
that our facilities relocation and restructuring expense for the fourth quarter
of 2009 will be lower than the same period in 2008 primarily due to the timing
of restructuring activities.
36
Interest
Expense
We expect
that our interest expense for the fourth quarter of 2009 will increase compared
to the same period in 2008 primarily as a result of: (1) the issuance of the
Senior Notes discussed in “Liquidity and Capital Resources-Long-term Debt” and
(2) the effect of increased interest rates under our amended senior secured term
loan. These increases are expected to be partially offset by the
effect on interest expense of (1) the $232.5 million in prepayments of the
senior secured term loan since the third quarter of 2008, including $132.5
million paid during the 2009 first nine months and (2) the interest rate swaps
discussed in “Liquidity and Capital Resources – Derivatives.”
Liquidity
and Capital Resources
Sources
and Uses of Cash for the Nine Months Ended September 27, 2009
Cash and cash equivalents totaled
$616.9 million at September 27, 2009 compared to $63.1 million at December 28,
2008. For the nine months ended September 27, 2009, net cash provided by
operating activities totaled $276.4 million, which includes the following
significant items:
|
·
|
Our
net income of $32.4 million;
|
|
·
|
Depreciation
and amortization of $142.0 million;
|
|
·
|
Impairment
of long-lived assets charges of $28.9
million;
|
|
·
|
Our
deferred income tax benefit of $27.0
million;
|
|
·
|
The
write-off and amortization of deferred financing costs of $13.9
million;
|
|
·
|
The
receipt of deferred vendor incentives, net of amount recognized, of $13.0
million; and
|
|
·
|
Changes
in operating assets and liabilities of $26.7 million principally
reflecting an increase of $6.5 million in prepaid expenses and other
current assets and a decrease of $33.2 million in accounts payable,
accrued expenses and other current
liabilities.
|
We expect
positive cash flows from continuing operating activities during the fourth
quarter of 2009.
Additionally,
for the nine months ended September 27, 2009, we had the following significant
sources and uses of cash other than from operating activities:
|
·
|
Proceeds
of $556.0 million primarily from the issuance of the Senior Notes
discussed below under “Long-term
Debt”;
|
|
·
|
Net
repayments of other long-term debt of $153.7 million including a
prepayment of $132.5 million on our senior secured term
loan;
|
|
·
|
Cash
capital expenditures totaling $65.3 million, including the construction of
new restaurants (approximately $15.8 million) and the remodeling of
existing restaurants;
|
|
·
|
Deferred
financing costs of $38.0 million;
and
|
|
·
|
Dividends
to Wendy’s/Arby’s of $35.0 million.
|
The net
cash provided by operations before the effect of exchange rate changes on cash
was approximately $552.1 million.
Working
Capital
Working
capital, which equals current assets less current liabilities, was $380.4
million at September 27, 2009, reflecting a current ratio, which equals current
assets divided by current liabilities, of 1.8:1. The working capital at
September 27, 2009 increased $524.1 million from a deficit of $143.7 million at
December 28, 2008, primarily related to $276.4 million in net cash provided by
operating activities and $329.3 million in net cash provided by financing
activities partially offset by $53.6 million in net cash used in investing
activities.
37
Long-term
Debt
There
were no material changes to the terms of any debt obligations since December 28,
2008, as discussed in our Form S-4, except as follows:
Senior
Notes
On June
23, 2009, we issued $565.0 million principal amount of Senior Notes. The Senior
Notes will mature on July 15, 2016 and accrue interest at 10.00% per annum,
payable semi-annually on January 15 and July 15, with the first payment on
January 15, 2010. The Senior Notes were issued at 97.533% of the principal
amount, representing a yield to maturity of 10.50% and resulting in net proceeds
paid to us of $551.1 million. The $13.9 million discount is being accreted and
the related charge included in interest expense until the Senior Notes mature.
The Senior Notes are fully and unconditionally guaranteed, jointly and
severally, on an unsecured basis by certain direct and indirect domestic
subsidiaries of Wendy’s/Arby’s Restaurants (collectively, the
“Guarantors”).
Wendy’s/Arby’s
Restaurants incurred approximately $21.1 million in costs related to the
issuance of the Senior Notes which are being amortized to interest
expense over the Senior Notes’ term utilizing the effective interest
method.
An
Indenture dated as of June 23, 2009 (the “Indenture”) among Wendy’s/Arby’s
Restaurants, the Guarantors and U.S. Bank National Association, as trustee (the
“Trustee”), includes certain customary covenants that, subject to a number of
important exceptions and qualifications, limit the ability of Wendy’s/Arby’s
Restaurants and its restricted subsidiaries to, among other things, incur debt
or issue preferred or disqualified stock, pay dividends on equity interests,
redeem or repurchase equity interests or prepay or repurchase subordinated debt,
make some types of investments and sell assets, incur certain liens, engage in
transactions with affiliates (except on an arms-length basis), and consolidate,
merge or sell all or substantially all of their assets.
On
November 9, 2009, Wendy's/Arby's Restaurants commenced an exchange offer for the
Initial Notes issued on June 23, 2009 pursuant to a registration rights
agreement entered into in connection with the issuance of the Initial
Notes. In the exchange offer, Wendy’s/Arby’s Restaurants is offering
to exchange its outstanding $565.0 million aggregate principal amount of Initial
Notes for a like aggregate amount of its 10.00% Senior Notes due 2016 registered
under the Securities Act of 1933 (the “Exchange
Notes”). The Exchange Notes issued in the exchange offer will have
substantially similar terms as the Initial Notes, except that the Exchange Notes
will have no transfer restrictions or registration rights. The
expiration date of the exchange offer is December 9, 2009, unless extended by
Wendy’s/Arby’s Restaurants.
Senior
Secured Term Loan
On June
10, 2009, Wendy’s/Arby’s Restaurants entered into an Amendment No. 1 to the
amended and restated Arby’s Credit Agreement (as so amended, the “Credit
Agreement”) which, among other things (1) permitted the issuance by
Wendy’s/Arby’s Restaurants of the Senior Notes described above and the
incurrence of debt thereunder, and permitted Wendy’s/Arby’s Restaurants to
dividend to Wendy’s/Arby’s the net cash proceeds of the Senior Notes issuance
less amounts used to prepay the senior secured term loan under the Credit
Agreement (the “Term Loan”) and pay accrued interest thereon and certain other
payments, (2) modified certain total leverage financial covenants, added certain
financial covenants based on senior secured leverage ratios and modified the
minimum interest coverage ratio, (3) permitted the prepayment at any time prior
to maturity of certain Senior Notes of Wendy’s and eliminated certain
incremental debt baskets in the covenant prohibiting the incurrence of
additional indebtedness and (4) modified the interest margins to provide that
the margins will fluctuate based on Wendy’s/Arby’s Restaurants’ corporate credit
rating. Wendy’s/Arby’s Restaurants incurred approximately $3.1
million in costs related to such Amendment No. 1.
As
amended, the Term Loan and amounts borrowed under the revolving credit facility
(the “Amended Revolver”) under the Credit Agreement bear interest at our option
at either (1) the Eurodollar Base Rate (as defined in the Credit Agreement), as
adjusted pursuant to applicable regulations (but not less than 2.75%), plus an
interest rate margin of 4.00%, 4.50%, 5.00% or 6.00% per annum, depending on
Wendy’s/Arby’s Restaurants’ corporate credit rating, or (2) the Base Rate (as
defined in the Credit Agreement), which is the higher of the interest rate
announced by the administrative agent for the Credit Agreement as its base rate
and the Federal funds rate plus 0.50% (but not less that 3.75%), in either case
plus an interest rate margin of 3.00%, 3.50%, 4.00% or 5.00% per annum,
depending on Wendy’s/Arby’s Restaurants’ corporate credit rating. Based on
Wendy’s/Arby’s Restaurants’ corporate credit rating at the effective date of
Amendment No. 1 and as of September 27, 2009, the applicable interest rate
margins available to us were 4.50% for Eurodollar Base Rate borrowings and 3.50%
for Base Rate borrowings. Since the effective date of Amendment No. 1 and as of
September 27, 2009, we have elected to use the Eurodollar Base Rate which
resulted in a rate of 7.25% for the 2009 third quarter.
38
Concurrent
with the closing of the issuance of the Senior Notes, we prepaid the Term Loan
in an aggregate principal amount of $132.5 million and accrued interest
thereon.
During
the nine months ended September 27, 2009, we borrowed a net total of $51.2
million under the Amended Revolver; however, no amounts were outstanding as of
September 27, 2009. The Amended Revolver includes a sub-facility for the
issuance of letters of credit up to $50.0 million. The availability
under the Amended Revolver as of September 27, 2009 was $135.6 million, which is
net of $34.4 million for outstanding letters of credit.
Derivatives
During
the third quarter of 2009, we entered into $361.0 million of notional amount
interest rate swap agreements (the “Interest Rate Swaps”) that swap the fixed
rate interest rates on our 6.20% and 6.25% Wendy’s Senior Notes for floating
rates. The Company’s primary objective for entering into
derivative instruments is to manage its exposure to changes in interest rates,
as well as to maintain an appropriate mix of fixed and variable rate
debt.
The
Interest Rate Swaps are accounted for as fair value hedges and qualify for the
short-cut method under the applicable guidance. At September 27, 2009, the fair
value of our Interest Rate Swaps was $2.8 million and has been included in
“Deferred costs and other assets” and as an adjustment to the carrying amount of
the 6.20% and 6.25% Wendy’s Senior Notes.
Debt
Covenants
We were
in compliance with all the covenants of the Credit Agreement as of September 27,
2009 and we expect to remain in compliance with all of these covenants for the
next twelve months. As of September 27, 2009 there was $380.0 million available
for the payment of dividends indirectly to Wendy’s/Arby’s under the covenants of
the Credit Agreement which includes the net proceeds, as defined, from the
Senior Notes less any dividends paid since their issuance.
Wendy’s
6.20% and 6.25% Senior Notes and 7% Debentures (the “Wendy’s Notes”) contain
covenants that specify limits on the incurrence of indebtedness. We were in
compliance with these covenants as of September 27, 2009 and project that we
will be in compliance with these covenants for the next twelve
months.
A
significant number of the underlying leases in the Arby’s restaurants segment
for sale-leaseback obligations and capitalized lease obligations, as well as the
operating leases, require or required periodic financial reporting of certain
subsidiary entities within ARG or of individual restaurants, which in many cases
have not been prepared or reported. The Company has negotiated waivers and
alternative covenants with its most significant lessors which substitute
consolidated financial reporting of ARG for that of individual subsidiary
entities and which modify restaurant level reporting requirements for more than
half of the affected leases. Nevertheless, as of September 27, 2009,
the Company was not in compliance, and remains not in compliance, with the
reporting requirements under those leases for which waivers and alternative
financial reporting covenants have not been negotiated. However, none of the
lessors has asserted that the Company is in default of any of those lease
agreements. The Company does not believe that such non-compliance will have a
material adverse effect on its condensed consolidated financial position or
results of operations.
Contractual
Obligations
As of
September 27, 2009, there have been no material changes to those contractual
obligations outside of the ordinary course of business except: (1) the issuance
of $565.0 million of the Senior Notes in June 2009, (2) the repayment of $132.5
million of the Term Loan, (3) Interest Rate Swaps with a notional amount of
$361.0 million and (4) a supply chain relationship agreement with a $15.5
million commitment to fund expenses of a new purchasing co-operative for the
Wendy’s system entered into between Wendy’s and its franchisees.
39
Credit
Ratings
Wendy’s/Arby’s
Restaurants is rated by Moody’s Investor’s Service (“Moody’s”) and specific debt
issuances of Wendy’s/Arby’s Restaurants and Wendy’s are rated by Standard &
Poor’s (“S&P”) and Moody’s.
In June
2009, the agencies assigned the following ratings for Wendy’s/Arby’s Restaurants
and the Wendy’s Notes:
S&P
|
Moody’s
|
||||
Corporate
family/corporate credit
|
|||||
Entity
|
Not
applicable
|
Wendy’s/Arby’s
Restaurants
|
|||
Rating
|
-
|
B2
|
|||
Outlook
|
-
|
Stable
|
|||
Wendy’s/Arby’s
Restaurants Senior Notes
|
B+
|
B2
|
|||
Wendy’s/Arby’s
Restaurants Term Loan
|
BB
|
Ba2
|
|||
Wendy’s
Notes
|
B-
|
Caa1
|
There are
many factors that could lead to future upgrades or downgrades of our credit
ratings. Credit rating upgrades or downgrades could lead to, among other things,
changes in borrowing costs and changes in our ability to access capital markets
on acceptable terms.
A rating
is not a recommendation to buy, sell or hold any security, and may be subject to
revision or withdrawal at any time by the rating agency. Each rating should be
evaluated independently of any other rating.
Dividends
During
the first nine months of 2009, $35.0 million of intercompany dividends were paid
to Wendy’s/Arby’s. No intercompany dividends were paid to
Wendy’s/Arby’s during the first nine months of 2008. As of September
27, 2009, under the terms of the Credit Agreement, there was $380.0 million
immediately available for the payment of dividends to Wendy’s/Arby’s, subject to
adjustments, which includes the net proceeds, as defined, from the Senior Notes
less any dividends paid since their issuance.
Sources
and Uses of Cash for the Fourth Quarter of 2009
Our
anticipated consolidated cash requirements for continuing operations for the
fourth quarter of 2009, exclusive of operating cash flow requirements, consist
principally of:
·
|
Cash
capital expenditures of approximately $58.7
million;
|
·
|
Intercompany
dividends of approximately $80.0 million which may be used to fund
Wendy’s/Arby’s stock repurchases, payment of Wendy’s/Arby’s dividends to
its shareholders and for other corporate
purposes;
|
·
|
Other
potential intercompany dividends and
fees;
|
·
|
Scheduled
debt principal repayments aggregating $5.0 million;
and
|
·
|
The
costs of any potential business acquisitions or financing
activities.
|
We expect to meet these requirements from operating cash flows and available cash.
Legal
and Environmental Matters
The
Company disclosed putative class action complaints in its Form S-4 that had been
filed against Wendy’s, its directors, and in two cases also Wendy’s/Arby’s,
between April 25 and June 13, 2008, alleging breach of fiduciary duties arising
out of the Wendy’s board of directors’ search for a merger partner and out of
its approval of the merger agreement with Wendy’s/Arby’s on April 23, 2008, and
failure to disclose material information related to the merger in Amendment No.
3 to the Wendy’s/Arby’s Form S-4 under the Securities Act of 1933 filed on
August 14, 2008. These cases were described in the Company’s Form S-4 as the
Guiseppone, Henzel, Smith and Ravanis cases.
40
As noted
in the Company’s Form S-4, on July 1, 2009, the Common Pleas Court of Franklin
County, Ohio entered a final order approving settlement of all claims in the
Guiseppone, Henzel and Smith cases and certifying a class for settlement
purposes only. On July 9, 2009, the Supreme Court of the State of New York, New
York County entered a dismissal of the Ravanis case, with prejudice. The
disposition of these cases was not material to the results of operations or
financial condition of the Company.
In
addition to the matters described above, we are involved in other litigation and
claims incidental to our current and prior businesses. We have reserves for all
of our legal and environmental matters aggregating $3.1 million as of September
27, 2009. Although the outcome of these matters cannot be predicted with
certainty and some of these matters may be disposed of unfavorably to us, based
on currently available information, including legal defenses available to us,
and given the aforementioned reserves and our insurance coverage, we do not
believe that the outcome of these legal and environmental matters will have a
material adverse effect on our consolidated financial position or results of
operations.
Seasonality
Our
restaurant operations are moderately impacted by seasonality because Wendy’s
restaurant revenues are normally higher during the summer months than during the
winter months. Because of this seasonality, results for any
particular quarter are not necessarily indicative of the results that may be
achieved for any other quarter or for the full fiscal year.
Recently
Issued Accounting Pronouncements Not Yet Adopted
In June
2009, the FASB issued guidelines on the consolidation of variable interest
entities which alters how a company determines when an entity that is
insufficiently capitalized or not controlled through voting should be
consolidated. A company has to determine whether it should provide consolidated
reporting of an entity based upon the entity's purpose and design and the parent
company's ability to direct the entity's actions. The guidance is effective
commencing with our 2010 fiscal year. We are currently evaluating the effects,
if any, that adoption of this standard will have on our consolidated financial
statements.
In August
2009, the FASB issued a standard on the fair value measurement of liabilities
which is based on an assumed transfer of the liability to a market participant
as of the measurement date and also provides guidance for the measurement of the
fair value of liabilities. The guidance is effective commencing with our 2009
fourth quarter. We are currently evaluating the effects, if any, that adoption
of this standard will have on our consolidated financial
statements.
41
Item
3. Quantitative and
Qualitative Disclosures about Market Risk
This
“Quantitative and Qualitative Disclosures about Market Risk” has been presented
in accordance with Item 305 of Regulation S-K promulgated by the Securities and
Exchange Commission (the “SEC”) and should be read in conjunction with
“Quantitative and Qualitative Disclosures about Market Risk” in our Registration
Statement on Form S-4 filed with the SEC on August 28, 2009 (registration number
333-161613), as amended by amendments to the Form S-4 filed on October 6,
October 27 and November 5, 2009 (the “Form S-4”). Certain statements we make
under this Item 3 constitute “forward-looking statements” under the Private
Securities Litigation Reform Act of 1995. See “Special Note Regarding
Forward-Looking Statements and Projections” in “Part II – Other Information”
preceding “Item 1.”
We are
exposed to the impact of interest rate changes, changes in commodity prices,
changes in the fair value of our investments and foreign currency fluctuations
primarily related to the Canadian dollar. In the normal course of business, we
employ established policies and procedures to manage our exposure to these
changes using financial instruments we deem appropriate.
Interest
Rate Risk
Our
objective in managing our exposure to interest rate changes is to limit the
impact on our earnings and cash flows. Our policy is to maintain a target, over
time and subject to market conditions, of between 50% and 75% of “Long-term
debt” as fixed rate debt. As of September 27, 2009 our long-term debt, including
current portion and excluding the effect of interest rate swaps discussed below,
aggregated $1,504.1 million and consisted of $1,034.1 million of fixed-rate
debt, $252.8 million of variable-rate debt, and $217.2 million of capitalized
lease and sale-leaseback obligations. Our variable interest rate debt consists
of $252.8 million of term loan borrowings under a variable-rate senior secured
term loan facility due through 2012 (the “Credit Agreement”). The term loan
borrowings under the Credit Agreement and amounts borrowed under the revolving
credit facility included in the Credit Agreement bear interest at the borrowers’
option at either (1) LIBOR (0.60% at June 28, 2009) of not less than 2.75% plus
an interest rate margin of 4.5% or (2) the higher of a base rate determined by
the administrative agent for the Credit Agreement or the Federal funds rate plus
0.5% (but not less than 3.75%), in either case plus an interest rate margin of
3.5%. The Base Rate option was chosen as of September 27, 2009 with a resulting
7.25% interest rate. Consistent with our policy, we entered into several
outstanding interest rate swap agreements (the “Interest Rate Swaps”) during the
third quarter of 2009 with notional amounts totaling $361.0 million that swap
the fixed rate interest rates on our 6.20% and 6.25% Wendy’s senior notes for
floating rates. The Interest Rate Swaps are accounted for as fair value hedges
and qualify for the short-cut method under the applicable
guidance. At September 27, 2009, the fair value of our Interest Rate
Swaps was $2.8 million and was included in “Deferred costs and other assets” and
as an adjustment to the carrying amount of the 6.20% and 6.25% Wendy’s Senior
Notes. Our policies prohibit the use of derivative instruments for trading
purposes, and we have procedures in place to monitor and control their use. If
any portion of the hedge is determined to be ineffective, any changes in fair
value would be recognized in our results of operations.
Overall
Market Risk
Our
overall market risk as of September 27, 2009 includes cash equivalents, certain
cost investments and our equity investment in TimWen. As of September 27, 2009,
these investments were classified in our unaudited condensed consolidated
balance sheet as follows (in millions):
Cash
equivalents included in “Cash and cash equivalents”
|
$ | 366.7 | ||
Restricted
cash equivalents:
|
||||
Current
|
1.0 | |||
Non-current
|
5.8 | |||
Equity
investment
|
99.4 | |||
Cost
investments
|
4.6 | |||
$ | 477.5 |
Our cash
equivalents are short-term, highly liquid investments with maturities of three
months or less when acquired and consisted principally of cash in bank money
market and mutual fund accounts, and are primarily not in Federal Deposit
Insurance Corporation (“FDIC”) insured accounts, $6.8 million of which was
restricted as of September 27, 2009.
42
At
September 27, 2009 our investments were classified in the following general
types or categories (in millions):
At
Fair Value
|
Carrying
Value
|
|||||||||||||||
Type
|
At
Cost
|
(a)
|
Amount
|
Percent
|
||||||||||||
Cash
equivalents
|
$ | 366.7 | $ | 366.7 | $ | 366.7 | 77 | % | ||||||||
Current
and non-current restricted cash equivalents
|
6.8 | 6.8 | 6.8 | 1 | % | |||||||||||
Other
non-current investments accounted for at:
|
||||||||||||||||
Equity
|
99.4 | 99.4 | 99.4 | 21 | % | |||||||||||
Cost
|
4.6 | 5.2 | 4.6 | 1 | % | |||||||||||
$ | 477.5 | $ | 478.1 | $ | 477.5 | 100 | % |
____________________________
|
(a)
|
There
can be no assurance that we would be able to realize these
amounts.
|
Our
investments which are accounted for at cost included limited partnerships and
other non-current investments in which we do not have significant influence over
the investees. Realized gains and losses on our investments recorded at cost are
reported as income or loss in the period in which the securities are sold.
Investments accounted for in accordance with the equity method of accounting are
those in which we have significant influence over the investees and for which
our results of operations include our share of the income or loss of the
investees. We review all of our investments in which we have unrealized losses
and recognize investment losses currently for any unrealized losses we deem to
be other than temporary.
Sensitivity
Analysis
Our
estimate of market risk exposure is presented for each class of financial
instruments held by us at September 27, 2009 for which an immediate adverse
market movement would cause a potential material impact on our financial
position or results of operations. We believe that the adverse market movements
described below represent the hypothetical loss to our financial position or our
results of operations and do not represent the maximum possible loss nor any
expected actual loss, even under adverse conditions, because actual adverse
fluctuations would likely differ. The table below reflects the risk for those
financial instruments entered into as of September 27, 2009 based upon assumed
immediate adverse effects as noted below (in millions):
Carrying
Value
|
Interest
Rate Risk
|
Equity
Price Risk
|
Foreign
Currency Risk
|
|||||||||||||
Cash
equivalents
|
$ | 366.7 | $ | - | $ | - | $ | - | ||||||||
Current
and non-current restricted cash equivalents
|
6.8 | - | - | - | ||||||||||||
Equity
investments
|
99.4 | - | (9.9 | ) | (9.9 | ) | ||||||||||
Cost
investments
|
4.6 | - | (0.5 | ) | - | |||||||||||
Interest
Rate Swaps in an asset position
|
2.8 | (12.1 | ) | - | - | |||||||||||
Long-term
debt, excluding capitalized lease and sale-leaseback obligations-variable
rate
|
252.8 | (6.0 | ) | - | - | |||||||||||
Long-term
debt, excluding capitalized lease and sale-leaseback obligations-fixed
rate
|
1,034.1 | (50.7 | ) | - | - |
The
sensitivity analysis of financial instruments held at September 27, 2009 assumes
an instantaneous one percentage point adverse change in market interest rates,
and an instantaneous 10% adverse change in the foreign currency exchange rates
versus the United States dollar, each from their levels at September 27, 2009
and with all other variables held constant. The equity price risk reflects the
impact of a 10% decrease in the carrying value of our equity securities,
including those in “Cost investments” in the tables above. The sensitivity
analysis also assumes that the decreases in the equity markets and foreign
exchange rates are other than temporary.
Our cash
equivalents and restricted cash equivalents included $373.5 million as of
September 27, 2009 of bank money market accounts and interest-bearing brokerage
and bank accounts which are all investments with a maturity of three months or
less when acquired and are designed to maintain a stable value.
As of
September 27, 2009, we had amounts of both fixed-rate debt and variable-rate
debt. On the fixed-rate debt, the interest rate risk presented with
respect to our long-term debt, excluding capitalized lease and sale-leaseback
obligations, primarily relates to the potential impact a decrease in interest
rates of one percentage point has on the fair value of our $1,034.1 million of
fixed-rate debt and not on our financial position or our results of
operations. However, as discussed above under “Interest Rate Risk,” we
have interest rate swap agreements on a portion of our fixed-rate
debt. The interest rate risk of our fixed-rate debt presented in the
tables above exclude the effect of the $361.0 million for which we designated
interest rate swap agreements as fair value hedges for the terms of the swap
agreements. As interest rates decrease, the fair market values of the
interest rate swap agreements increase. The interest rate risks
presented with respect to the interest rate swap agreements represent the
potential impact the indicated change has on our results of operations. On the
variable-rate debt, the interest rate risk presented with respect to our
long-term debt, excluding capitalized lease and sale-leaseback obligations,
represents the potential impact an increase in interest rates of one percentage
point has on our results of operations related to our $252.8 million of
variable-rate long-term debt outstanding as of September 27, 2009. Our
variable-rate long-term debt outstanding as of September 27, 2009 had a weighted
average remaining maturity of approximately two years.
43
Item
4. Controls and
Procedures
Evaluation
of Disclosure Controls and Procedures
Our
management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15(e) or
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)), as of September 27, 2009. Based on such evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that as of September 27, 2009, our
disclosure controls and procedures were effective in (1) recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by us in the reports that we file or submit under the Exchange Act and
(2) ensuring that information required to be disclosed by us in such reports is
accumulated and communicated to our management, including our Chief Executive
Officer and our Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Change
in Internal Control Over Financial Reporting
On
September 29, 2008, Triarc Companies, Inc. (renamed “Wendy’s/Arby’s Group,
Inc.”) completed the acquisition of Wendy’s and its subsidiaries. As part of the
integration activities, Wendy’s/Arby’s Group, Inc. financial reporting controls
and procedures, which include substantially all of our financial reporting
controls and procedures, are being incorporated into this acquired
business. During the third quarter of 2009, an additional phase of the
integration of Wendy’s accounting systems was successfully completed. The
integrated accounting system was used for the preparation of financial
statements and other information presented in this Quarterly Report on Form
10-Q. We expect further integration of Wendy's processes and
systems through the remainder of 2009 and into 2010.
There
were no other changes in our internal control over financial reporting made
during the quarter that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Inherent
Limitations on Effectiveness of Controls
There are
inherent limitations in the effectiveness of any control system, including the
potential for human error and the circumvention or overriding of the controls
and procedures. Additionally, judgments in decision-making can be faulty and
breakdowns can occur because of simple error or mistake. An effective control
system can provide only reasonable, not absolute, assurance that the control
objectives of the system are adequately met. Accordingly, our management,
including our Chief Executive Officer and Chief Financial Officer, does not
expect that our control system can prevent or detect all error or fraud.
Finally, projections of any evaluation or assessment of effectiveness of a
control system to future periods are subject to the risks that, over time,
controls may become inadequate because of changes in an entity’s operating
environment or deterioration in the degree of compliance with policies or
procedures.
44
Part
II. OTHER
INFORMATION
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS AND PROJECTIONS
This
Quarterly Report on Form 10-Q and oral statements made from time to time by
representatives of the Company may contain or incorporate by reference certain
statements that are not historical facts, including, most importantly,
information concerning possible or assumed future results of operations of the
Company. Those statements, as well as statements preceded by, followed by, or
that include the words “may,” “believes,” “plans,” “expects,” “anticipates,” or
the negation thereof, or similar expressions, constitute “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995 (the “Reform Act”). All statements that address future operating,
financial or business performance; strategies or expectations; future synergies,
efficiencies or overhead savings; anticipated costs or charges; future
capitalization; and anticipated financial impacts of recent or pending
transactions are forward-looking statements within the meaning of the Reform
Act. The forward-looking statements are based on our expectations at the time
such statements are made, speak only as of the dates they are made and are
susceptible to a number of risks, uncertainties and other factors. Our actual
results, performance and achievements may differ materially from any future
results, performance or achievements expressed or implied by our forward-looking
statements. For all of our forward-looking statements, we claim the protection
of the safe harbor for forward-looking statements contained in the Reform Act.
Many important factors could affect our future results and could cause those
results to differ materially from those expressed in or implied by the
forward-looking statements contained herein. Such factors, all of which are
difficult or impossible to predict accurately, and many of which are beyond our
control, include, but are not limited to, the following:
|
·
|
competition,
including pricing pressures, aggressive marketing and the potential impact
of competitors’ new unit openings on sales of Wendy’s® and Arby’s®
restaurants;
|
|
·
|
consumers’
perceptions of the relative quality, variety, affordability and value of
the food products we offer;
|
|
·
|
success
of operating initiatives, including advertising and promotional efforts
and new product and concept development by us and our
competitors;
|
|
·
|
development
costs, including real estate and construction
costs;
|
|
·
|
changes
in consumer tastes and preferences, including changes resulting from
concerns over nutritional or safety aspects of beef, poultry, French fries
or other foods or the effects of food-borne illnesses such as “mad cow
disease” and avian influenza or “bird flu,” and changes in spending
patterns and demographic trends, such as the extent to which consumers eat
meals away from home;
|
|
·
|
certain
factors affecting our franchisees, including the business and financial
viability of franchisees, the timely payment of franchisees’ obligations
due to us or to national or local advertising organizations, and the
ability of our franchisees to open new restaurants in accordance with
their development commitments, including their ability to finance
restaurant development and
remodels;
|
|
·
|
availability,
location and terms of sites for restaurant development by us and our
franchisees;
|
|
·
|
delays
in opening new restaurants or completing remodels of existing
restaurants;
|
|
·
|
the
timing and impact of acquisitions and dispositions of
restaurants;
|
|
·
|
our
ability to successfully integrate acquired restaurant
operations;
|
|
·
|
anticipated
or unanticipated restaurant closures by us and our
franchisees;
|
|
·
|
our
ability to identify, attract and retain potential franchisees with
sufficient experience and financial resources to develop and operate
Wendy’s and Arby’s restaurants
successfully;
|
|
·
|
availability
of qualified restaurant personnel to us and to our franchisees, and the
ability to retain such personnel;
|
|
·
|
our
ability, if necessary, to secure alternative distribution of supplies of
food, equipment and other products to Wendy’s and Arby’s restaurants at
competitive rates and in adequate amounts, and the potential financial
impact of any interruptions in such
distribution;
|
45
|
·
|
changes
in commodity (including beef and chicken), labor, supply, fuel, utilities,
distribution and other operating
costs;
|
|
·
|
availability
and cost of insurance;
|
|
·
|
adverse
weather conditions;
|
|
·
|
availability,
terms (including changes in interest rates) and deployment of
capital;
|
|
·
|
changes
in legal or self-regulatory requirements, including franchising laws,
accounting standards, payment card industry rules, overtime rules, minimum
wage rates, government-mandated health benefits, tax legislation and
menu-board labeling requirements;
|
|
·
|
the
costs, uncertainties and other effects of legal, environmental and
administrative proceedings;
|
|
·
|
the
impact of general economic conditions on consumer spending, including a
slower consumer economy and high unemployment rates, particularly in
geographic regions that contain a high concentration of Wendy’s or Arby’s
restaurants, and the effects of war or terrorist
activities;
|
|
·
|
the
impact of our continuing investment in series A senior secured notes of
Deerfield Capital Corp. following our 2007 corporate restructuring;
and
|
|
·
|
other
risks and uncertainties affecting us and our subsidiaries referred to in
our Registration Statement on Form S-4 filed with the U.S. Securities and
Exchanges Commission (the “SEC”) on August 28, 2009 (registration number
333-161613), as amended by amendments to the Form S-4 filed on October 6,
October 27 and November 5, 2009 and in our other current and periodic
filings with the SEC.
|
All
future written and oral forward-looking statements attributable to us or any
person acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained or referred to in this section. New risks and
uncertainties arise from time to time, and it is impossible for us to predict
these events or how they may affect us. We assume no obligation to update any
forward-looking statements after the date of this Quarterly Report on Form 10-Q
as a result of new information, future events or developments, except as
required by Federal securities laws. In addition, it is our policy generally not
to make any specific projections as to future earnings, and we do not endorse
any projections regarding future performance that may be made by third
parties.
46
Item
1. Legal Proceedings
The
Company disclosed putative class action complaints in its Form S-4 that had been
filed against Wendy’s, its directors, and in two cases also Wendy’s/Arby’s,
between April 25 and June 13, 2008, alleging breach of fiduciary duties arising
out of the Wendy’s board of directors’ search for a merger partner and out of
its approval of the merger agreement with Wendy’s/Arby’s on April 23, 2008, and
failure to disclose material information related to the merger in Amendment No.
3 to the Wendy’s/Arby’s Form S-4 under the Securities Act of 1933 filed on
August 14, 2008. These cases were described in the Company’s Form S-4 as the
Guiseppone, Henzel, Smith and Ravanis cases.
As noted
in the Company’s Form S-4, on July 1, 2009, the Common Pleas Court of Franklin
County, Ohio entered a final order approving settlement of all claims in the
Guiseppone, Henzel and Smith cases and certifying a class for settlement
purposes only. On July 9, 2009, the Supreme Court of the State of New York, New
York County entered a dismissal of the Ravanis case, with prejudice. The
disposition of these cases was not material to the results of operations or
financial condition of the Company.
In
addition to the matters described above, we are involved in other litigation and
claims incidental to our current and prior businesses. We have reserves for all
of our legal and environmental matters aggregating $3.1 million as of September
27, 2009. Although the outcome of these matters cannot be predicted with
certainty and some of these matters may be disposed of unfavorably to us, based
on currently available information, including legal defenses available to us,
and given the aforementioned reserves and our insurance coverage, we do not
believe that the outcome of these legal and environmental matters will have a
material adverse effect on our consolidated financial position or results of
operations.
47
Item
6. Exhibits.
EXHIBIT NO.
|
DESCRIPTION
|
2.1
|
Agreement
and Plan of Merger, dated as of April 23, 2008, by and among Triarc
Companies, Inc., Green Merger Sub Inc. and Wendy’s International, Inc.,
incorporated herein by reference to Exhibit 2.1 to Triarc’s Current Report
on Form 8-K dated April 29, 2008 (SEC file no. 001-02207).
|
2.2
|
Side
Letter Agreement, dated August 14, 2008, by and among Triarc Companies,
Inc., Green Merger Sub, Inc. and Wendy’s International, Inc., incorporated
herein by reference to Exhibit 2.3 to Triarc’s Registration Statement on
Form S-4, Amendment No. 3, filed on August 15, 2008 (Reg. no.
333-151336).
|
3.1
|
Certificate
of Formation of Wendy’s/Arby’s Restaurants, LLC (f/k/a Wendy’s
International Holdings, LLC), as amended to date, incorporated by
reference to Exhibit 3.1 to Wendy’s/Arby’s Restaurants’ Registration
Statement on Form S-4 filed on August 28, 2009 (Reg. no.
333-161613).
|
3.2
|
Third
Amended and Restated Limited Liability Company Operating Agreement of
Wendy’s/Arby’s Restaurants, LLC, incorporated by reference to Exhibit 3.2
to Wendy’s/Arby’s Restaurants’ Registration Statement on Form S-4 filed on
August 28, 2009 (Reg. no. 333-161613).
|
4.1
|
Supplemental
Indenture, dated as of July 8, 2009, among Wendy’s/Arby’s Restaurants,
LLC, the guarantors named therein and U.S. Bank National Association, as
Trustee, incorporated by reference to Exhibit 4.3 to Wendy’s/Arby’s
Group’s Quarterly Report on Form 10-Q for the quarterly period ended June
28, 2009 (SEC file no. 001-02207).
|
10.1
|
Form
of Non-Incentive Stock Option Agreement under the Wendy’s/Arby’s Group,
Inc. Amended and Restated 2002 Equity Participation Plan, as amended,
incorporated by reference to Exhibit 10.1 to Wendy’s/Arby’s Group’s
Quarterly Report on Form 10-Q for the quarterly period ended September 27,
2009 (SEC file no. 001-02207).
|
10.2
|
Form
of Restricted Share Unit Award Agreement under the Wendy’s/Arby’s Group,
Inc. Amended and Restated 2002 Equity Participation Plan, as amended,
incorporated by reference to Exhibit 10.2 to Wendy’s/Arby’s Group’s
Quarterly Report on Form 10-Q for the quarterly period ended September 27,
2009 (SEC file no. 001-02207).
|
10.3
|
Form
of Stock Option Award Letter for U.S. Grantees under the Wendy’s
International, Inc. 2007 Stock Incentive Plan, incorporated by reference
to Exhibit 10.3 to Wendy’s/Arby’s Group’s Quarterly Report on Form 10-Q
for the quarterly period ended September 27, 2009 (SEC file no.
001-02207).
|
10.4
|
Form
of Stock Unit Award Agreement under the Wendy’s International, Inc. 2007
Stock Incentive Plan, incorporated by reference to Exhibit 10.4 to
Wendy’s/Arby’s Group’s Quarterly Report on Form 10-Q for the quarterly
period ended September 27, 2009 (SEC file no. 001-02207).
|
10.5
|
Form
of letter amending non-qualified stock options granted under the Wendy’s
International, Inc. 2007 Stock Incentive Plan on May 1, 2007 and May 1,
2008 to certain former directors of Wendy’s International, Inc,
incorporated by reference to Exhibit 10.5 to Wendy’s/Arby’s Group’s
Quarterly Report on Form 10-Q for the quarterly period ended September 27,
2009 (SEC file no. 001-02207).
|
31.1
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
32.1
|
Certification
of the Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, furnished as an exhibit to
this Form 10-Q.*
|
__________________
* Filed
herewith.
48
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
WENDY’S/ARBY’S
RESTAURANTS, LLC
(Registrant)
|
|
Date: November
12, 2009
|
By:
/s/ Stephen E.
Hare
|
Stephen
E. Hare
|
|
Senior
Vice President and
|
|
Chief
Financial Officer
|
|
(On
behalf of the Company)
|
|
Date: November
12, 2009
|
By:
/s/ Steven B.
Graham
|
Steven
B. Graham
|
|
Senior
Vice President and
|
|
Chief
Accounting Officer
|
|
(Principal
Accounting Officer)
|
49
|
Exhibit
Index
|
EXHIBIT NO.
|
DESCRIPTION
|
2.1
|
Agreement
and Plan of Merger, dated as of April 23, 2008, by and among Triarc
Companies, Inc., Green Merger Sub Inc. and Wendy’s International, Inc.,
incorporated herein by reference to Exhibit 2.1 to Triarc’s Current Report
on Form 8-K dated April 29, 2008 (SEC file no. 001-02207).
|
2.2
|
Side
Letter Agreement, dated August 14, 2008, by and among Triarc Companies,
Inc., Green Merger Sub, Inc. and Wendy’s International, Inc., incorporated
herein by reference to Exhibit 2.3 to Triarc’s Registration Statement on
Form S-4, Amendment No. 3, filed on August 15, 2008 (Reg. no.
333-151336).
|
3.1
|
Certificate
of Formation of Wendy’s/Arby’s Restaurants, LLC (f/k/a Wendy’s
International Holdings, LLC), as amended to date, incorporated by
reference to Exhibit 3.1 to Wendy’s/Arby’s Restaurants’ Registration
Statement on Form S-4 filed on August 28, 2009 (Reg. no.
333-161613).
|
3.2
|
Third
Amended and Restated Limited Liability Company Operating Agreement of
Wendy’s/Arby’s Restaurants, LLC, incorporated by reference to Exhibit 3.2
to Wendy’s/Arby’s Restaurants’ Registration Statement on Form S-4 filed on
August 28, 2009 (Reg. no. 333-161613).
|
4.1
|
Supplemental
Indenture, dated as of July 8, 2009, among Wendy’s/Arby’s Restaurants,
LLC, the guarantors named therein and U.S. Bank National Association, as
Trustee, incorporated by reference to Exhibit 4.3 to Wendy’s/Arby’s
Group’s Quarterly Report on Form 10-Q for the quarterly period ended June
28, 2009 (SEC file no. 001-02207).
|
10.1
|
Form
of Non-Incentive Stock Option Agreement under the Wendy’s/Arby’s Group,
Inc. Amended and Restated 2002 Equity Participation Plan, as amended,
incorporated by reference to Exhibit 10.1 to Wendy’s/Arby’s Group’s
Quarterly Report on Form 10-Q for the quarterly period ended September 27,
2009 (SEC file no. 001-02207).
|
10.2
|
Form
of Restricted Share Unit Award Agreement under the Wendy’s/Arby’s Group,
Inc. Amended and Restated 2002 Equity Participation Plan, as amended,
incorporated by reference to Exhibit 10.2 to Wendy’s/Arby’s Group’s
Quarterly Report on Form 10-Q for the quarterly period ended September 27,
2009 (SEC file no. 001-02207).
|
10.3
|
Form
of Stock Option Award Letter for U.S. Grantees under the Wendy’s
International, Inc. 2007 Stock Incentive Plan, incorporated by reference
to Exhibit 10.3 to Wendy’s/Arby’s Group’s Quarterly Report on Form 10-Q
for the quarterly period ended September 27, 2009 (SEC file no.
001-02207).
|
10.4
|
Form
of Stock Unit Award Agreement under the Wendy’s International, Inc. 2007
Stock Incentive Plan, incorporated by reference to Exhibit 10.4 to
Wendy’s/Arby’s Group’s Quarterly Report on Form 10-Q for the quarterly
period ended September 27, 2009 (SEC file no. 001-02207).
|
10.5
|
Form
of letter amending non-qualified stock options granted under the Wendy’s
International, Inc. 2007 Stock Incentive Plan on May 1, 2007 and May 1,
2008 to certain former directors of Wendy’s International, Inc,
incorporated by reference to Exhibit 10.5 to Wendy’s/Arby’s Group’s
Quarterly Report on Form 10-Q for the quarterly period ended September 27,
2009 (SEC file no. 001-02207).
|
31.1
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
32.1
|
Certification
of the Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, furnished as an exhibit to
this Form 10-Q.*
|
_______________________
* Filed
herewith.
50