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EX-10.5 - Wendy's Coexhibit10-5_2010q2.htm
EX-10.7 - Wendy's Coexhibit10-7_2010q2.htm
EX-10.3 - Wendy's Coexhibit10-3_2010q2.htm
EX-10.9 - Wendy's Coexhibit10-9_2010q2.htm
EX-10.6 - Wendy's Coexhibit10-6_2010q2.htm
EX-10.11 - Wendy's Coexhibit10-11_2010q2.htm
EX-10.10 - Wendy's Coexhibit10-10_2010q2.htm
EXCEL - IDEA: XBRL DOCUMENT - Wendy's CoFinancial_Report.xls
EX-31.1 - Wendy's Coexhibit31-1_2010q2.htm
EX-31.2 - Wendy's Coexhibit31-2_2010q2.htm
EX-32.1 - Wendy's Coexhibit32-1_2010q2.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 July 4, 2010

OR

(  )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to _______________

Commission file number: 1-2207

WENDY’S/ARBY’S GROUP, INC.
(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 [X] No [  ]

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 [X ] 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   [X]          Accelerated filer [  ]       Non-accelerated filer [  ]     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 ]

There were 418,277,163 shares of the registrant’s Common Stock outstanding as of August 6, 2010.


 
 

 

PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements.


WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)


   
July 4,
   
January 3,
 
   
2010
   
2010
 
ASSETS
 
(Unaudited)
       
Current assets:
           
Cash and cash equivalents
  $ 508,380     $ 591,719  
Accounts and notes receivable
    96,625       88,004  
Inventories
    22,401       23,024  
Prepaid expenses and other current assets
    51,565       29,212  
Deferred income tax benefit
    66,556       66,557  
Advertising funds restricted assets
    83,550       80,476  
Total current assets
    829,077       878,992  
Notes receivable
    7,871       39,295  
Investments
    104,056       107,020  
Properties
    1,567,964       1,619,248  
Goodwill
    880,729       881,019  
Other intangible assets
    1,376,658       1,392,883  
Deferred costs and other assets
    73,345       56,959  
                Total assets
  $ 4,839,700     $ 4,975,416  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Current portion of long-term debt
  $ 18,002     $ 22,127  
Accounts payable
    79,246       103,454  
Accrued expenses and other current liabilities
    256,795       269,090  
Advertising funds restricted liabilities
    83,550       80,476  
Total current liabilities
    437,593       475,147  
Long-term debt
    1,556,623       1,500,784  
Deferred income
    31,373       13,195  
Deferred income taxes
    469,997       475,538  
Other liabilities
    175,630       174,413  
Commitments and contingencies
               
Stockholders’ equity:
               
Common stock
    47,042       47,042  
Additional paid-in capital
    2,766,425       2,761,433  
Accumulated deficit
    (386,171 )     (380,480 )
Common stock held in treasury, at cost
    (251,601 )     (85,971 )
Accumulated other comprehensive loss
    (7,211 )     (5,685 )
Total stockholders’ equity
    2,168,484       2,336,339  
Total liabilities and stockholders’ equity
  $ 4,839,700     $ 4,975,416  





See accompanying notes to condensed consolidated financial statements.



 
1

 

WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Amounts)


   
Three Months Ended
   
Six Months Ended
 
   
July 4,
   
June 28,
   
July 4,
   
June 28,
 
   
2010
   
2009
   
2010
   
2009
 
   
(Unaudited)
 
Revenues:
                       
Sales
  $ 782,683     $ 816,195     $ 1,530,880     $ 1,589,438  
Franchise revenues
    94,338       96,492       183,588       187,233  
      877,021       912,687       1,714,468       1,776,671  
Costs and expenses:
                               
Cost of sales
    659,084       686,462       1,300,506       1,362,404  
General and administrative
    97,512       112,746       207,994       222,624  
Depreciation and amortization
    44,944       44,687       91,270       96,349  
Impairment of long-lived assets
    2,414       8,700       14,015       15,580  
Facilities relocation and corporate restructuring
    -       3,013       -       7,174  
Other operating expense, net
    404       572       1,687       2,099  
      804,358       856,180       1,615,472       1,706,230  
Operating profit
    72,663       56,507       98,996       70,441  
Interest expense
    (34,389 )     (31,065 )     (70,667 )     (53,214 )
Loss on early extinguishment of debt
    (26,197 )     -       (26,197 )     -  
Investment income (expense), net
    5,049       (2,793 )     5,179       (4,587 )
Other than temporary losses on investments
    -       (789 )     -       (3,916 )
Other income (expense), net
    1,428       1,581       2,706       (1,016 )
Income before income taxes
    18,554       23,441       10,017       7,708  
Provision for income taxes
    (7,812 )     (8,549 )     (2,675 )     (3,740 )
Net income
  $ 10,742     $ 14,892     $ 7,342     $ 3,968  
                                 
Basic and diluted income per share
  $ .03     $ .03     $ .02     $ .01  
                                 
Dividends per share
  $ .015     $ .015     $ .03     $ .03  


See accompanying notes to condensed consolidated financial statements.




 
2

 

WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

   
Six Months Ended
 
   
July 4,
   
June 28,
 
   
2010
   
2009
 
   
(Unaudited)
 
Cash flows from operating activities:
           
Net income
  $ 7,342     $ 3,968  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    91,270       96,349  
Net receipt of deferred vendor incentive
    19,676       19,532  
Impairment of long-lived assets
    14,015       15,580  
Accretion of long-term debt
    11,015       4,840  
Write off and amortization of deferred financing costs
    8,846       11,824  
Share-based compensation provision
    6,651       7,760  
Distributions received from joint venture
    5,793       7,106  
Non-cash rent expense
    4,945       6,919  
Provision for doubtful accounts
    3,576       2,626  
Operating investment adjustments, net (see below)
    (5,122 )     2,605  
Equity in earnings of joint venture
    (4,480 )     (3,643 )
Deferred income tax benefit, net
    (4,053 )     (710 )
Other, net
    36       (8,228 )
Changes in operating assets and liabilities, net:
               
Accounts and notes receivable
    (7,016 )     747  
Inventories
    616       324  
Prepaid expenses and other current assets
    (7,462 )     (11,646 )
Accounts payable
    (14,006 )     (42,629 )
Accrued expenses and other current liabilities
    (29,433 )     33,070  
Net cash provided by operating activities
    102,209       146,394  
Cash flows from investing activities:
               
Capital expenditures
    (52,730 )     (40,015 )
Proceeds from dispositions
    4,111       7,680  
Investment activities, net (see below)
    32,187       36,911  
Other, net
    67       1,166  
Net cash (used in) provided by investing activities
    (16,365 )     5,742  
Cash flows from financing activities:
               
Proceeds from long-term debt
    497,661       553,776  
Repayments of long-term debt
    (466,362 )     (138,402 )
Deferred financing costs
    (14,375 )     (29,613 )
Repurchases of common stock
    (173,537 )     -  
Dividends paid
    (12,989 )     (14,073 )
Other, net
    681       1,384  
Net cash (used in) provided by financing activities
    (168,921 )     373,072  
Net cash (used in) provided by operations before effect of exchange rate changes on cash
    (83,077 )     525,208  
Effect of exchange rate changes on cash
    (262 )     703  
Net (decrease) increase in cash and cash equivalents
    (83,339 )     525,911  
Cash and cash equivalents at beginning of period
    591,719       90,090  
Cash and cash equivalents at end of period
  $ 508,380     $ 616,001  
­­­­­­­­­­­­­­

 
3

 

WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In Thousands)


   
Six Months Ended
 
   
July 4,
   
June 28,
 
   
2010
   
2009
 
   
(Unaudited)
 
Detail of cash flows related to investments:
           
Operating investment adjustments, net:
           
Income on collection of DFR Notes
  $ (4,909 )   $ -  
Other than temporary losses on investments
    -       3,916  
Other, net
    (213 )     (1,311 )
    $ (5,122 )   $ 2,605  
Investment activities, net:
               
Proceeds from sales of available-for-sale securities, securities sold short,
 and distributions from other investments
  $ 1,435     $ 29,663  
Decrease in restricted cash held for investment
    -       26,515  
Proceeds from repayment of DFR Notes
    30,752       -  
Cost of available-for-sale securities, other investments purchased, and
payments to cover short positions in securities
    -       (19,267 )
    $ 32,187     $ 36,911  
Supplemental cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 67,665     $ 44,459  
Income taxes, net of refunds
  $ 10,845     $ 4,427  
Supplemental non-cash investing and financing activities:
               
Total capital expenditures
  $ 56,337     $ 44,196  
Cash capital expenditures
    (52,730 )     (40,015 )
Non-cash capitalized lease and certain sales-leaseback obligations
  $ 3,607     $ 4,181  





See accompanying notes to condensed consolidated financial statements.

 
 
4

 
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



(1)     Basis of Presentation

The accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) of Wendy’s/Arby’s Group, Inc. (“Wendy’s/Arby’s” or “Wendy’s/Arby’s Group” and, together with its subsidiaries, the “Company,” “we,” “us” or “our”) 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, the Financial Statements contain all adjustments necessary to present fairly our financial position as of July 4, 2010 and results of our operations for the three months and six months ended July 4, 2010 and June 28, 2009 and our cash flows for the six months ended July 4, 2010 and June 28, 2009. The results of operations for the three months and six months ended July 4, 2010 are not necessarily indicative of the results to be expected for the full 2010 fiscal year. These Financial Statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 3, 2010 (the “Form 10-K”).

We report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to December 31. Our 2009 fiscal year consisted of 53 weeks with our fiscal fourth quarter containing 14 weeks. All three month and six month periods presented contain 13 weeks and 26 weeks, respectively. All references to years and quarters relate to fiscal periods rather than calendar periods.

(2)    Dispositions

Restaurant dispositions during the six months ended July 4, 2010 were not significant.

During the first half of 2009, the Company received proceeds from dispositions of $7,680 consisting of $3,384 from the sale of 10 Wendy’s International, Inc. (“Wendy’s”) units to a franchisee and $4,296 related to other dispositions. These sales resulted in a net gain of $304 which is included as an offset to “Depreciation and amortization.”

(3)    DFR Notes

On June 9, 2010, pursuant to a March 2010 agreement between the Company and Deerfield Capital Corp. (“DFR”), we received cash proceeds of $31,330, including interest, in consideration for the repayment and cancellation of the series A senior notes (the “DFR Notes”) we received in December 2007 in connection with the sale of Deerfield & Company (the “Deerfield Sale”) to DFR.  Additional information on the DFR Notes and the Deerfield Sale is discussed in our Form 10-K. The proceeds represented 64.1% of the $47,986 aggregate principal amount of the DFR Notes.

During the fourth quarter of 2008, we recognized an allowance for collectability of $21,227 to reduce the then carrying amount of the notes to $24,983. As a result, we recognized income of $4,909 during the three months and six months ended July 4, 2010, as the repayment proceeds exceeded the carrying value of the DFR Notes.  This gain is included in “Investment income (expense), net.”
 
(4)   Long-Term Debt
 
Long-term debt consisted of the following:

   
July 4, 2010
   
January 3, 2010
 
             
10% Senior Notes, due 2016
  $ 552,500     $ 551,779  
Term Loan, due 2017
    497,514       -  
Senior secured term loan
    -       251,488  
6.20% senior notes, due in 2014
    215,151       204,303  
6.25% senior notes
    -       193,618  
Sale-leaseback obligations due through 2029
    123,579       125,176  
Capitalized lease obligations due through 2036
    87,840       89,886  
7% Debentures, due in 2025
    80,640       80,081  
6.54% Secured equipment term loan, due in 2013
    13,215       18,901  
5% Convertible notes
    -       2,100  
Other
    4,186       5,579  
 
    1,574,625       1,522,911  
Less amounts payable within one year
    (18,002 )     (22,127 )
    $ 1,556,623     $ 1,500,784  


 
5

 
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



Credit Agreement

On May 24, 2010, Wendy’s/Arby’s Restaurants, LLC (“Wendy’s/Arby’s Restaurants”), a direct wholly-owned subsidiary of the Company, entered into a $650,000 Credit Agreement (the “Credit Agreement”), which includes a $500,000 senior secured term loan facility (the “Term Loan”) and a $150,000 senior secured revolving credit facility (the “Credit Facility”).  The Credit Agreement contains provisions for an uncommitted increase of up to $300,000 principal amount in the aggregate in the Credit Facility and/or Term Loan subject to the satisfaction of certain conditions. The Credit Facility includes a sub-facility for the issuance of up to $70,000 of letters of credit. The obligations under the Credit Agreement are secured by substantially all of the non-real estate assets of Wendy’s/Arby’s Restaurants and its domestic subsidiaries (other than certain unrestricted subsidiaries), the stock of its domestic subsidiaries (other than certain unrestricted subsidiaries), 65% of the stock of certain of its foreign subsidiaries, as well as by mortgages on certain restaurant properties.

The Term Loan was issued at 99.5% of the principal amount, which represented an original issue discount of 0.5% and resulted in net proceeds paid to us of $497,500. The $2,500 discount will be accreted and the related charge included in interest expense through the maturity of the Term Loan. The Term Loan will mature on May 24, 2017 and requires quarterly principal installments equal to 1% per annum of the initial principal amount outstanding, with the balance payable on the maturity date.

The Credit Facility expires not later than May 24, 2015. An unused commitment fee of 50 basis points per annum is payable quarterly on the average unused amount of the Credit Facility until the maturity date.

The interest rate on the Term Loan is based on (i) the Eurodollar Rate as defined in the Credit Agreement (but not less than 1.50%), plus 3.50%, or a Base Rate, as defined in the Credit Agreement (but not less than 2.50%), plus 2.50%. Since the date of the Term Loan and as of July 2, 2010, we have elected to use the Eurodollar Rate which resulted in an interest rate of 5.00% as of July 4, 2010.

Wendy’s/Arby’s Restaurants incurred approximately $16,353 in costs (of which $1,978 is unpaid as of July 4, 2010) related to the Credit Agreement, which will be amortized to interest expense over the Term Loan’s term utilizing the effective interest rate method.

Proceeds from the Term Loan were used to (1) repay approximately $253,849 of existing indebtedness, including fees and interest, under the then existing Wendy’s/Arby’s Restaurants amended senior secured term loan scheduled to be due in 2012, (2) redeem the Wendy’s 6.25% senior notes scheduled to be due in 2011, and (3) pay fees and expenses related to the Credit Agreement. The remaining Term Loan proceeds are expected to be used for working capital and other general corporate purposes.

The Company recognized a loss on early extinguishment of debt of $26,197 in the second quarter of 2010 related to the use of proceeds from the Term Loan. This loss consisted of (1) a $14,953 premium payment required to redeem the Wendy’s 6.25% senior notes, (2) $5,477 for the write-off of the unaccreted discount of the Wendy’s 6.25% senior notes (recorded in connection with the Wendy’s merger), and (3) $5,767 for the write-off of deferred costs associated with the repayment of the prior senior secured term loan.

The affirmative and negative covenants in the Credit Agreement include, among others, preservation of corporate existence; payment of taxes; and maintenance of insurance; and limitations on: indebtedness (including guarantee obligations of other indebtedness); liens; mergers, consolidations, liquidations and dissolutions; sales of assets; dividends and other payments in respect of capital stock; investments; payments of certain indebtedness; transactions with affiliates; changes in fiscal year; negative pledge clauses and clauses restricting subsidiary distributions; and material changes in lines of business.  The financial covenants contained in the Credit Agreement are (i) a consolidated interest coverage ratio, (ii) a consolidated senior secured leverage ratio and (iii) a consolidated senior secured lease adjusted leverage ratio. The covenants generally do not restrict Wendy’s/Arby’s or any of its subsidiaries that are not subsidiaries of Wendy’s/Arby’s Restaurants.  Wendy’s/Arby’s Restaurants was in compliance with all covenants of the Credit Agreement as of July 4, 2010.

Interest Rate Swaps

In connection with the redemption of the Wendy’s 6.25% senior notes discussed above, we cancelled four interest rate swaps with notional amounts totaling $175,000 that had swapped their fixed rate interest rates for floating interest rates. We recognized a gain on the cancellation of $1,875 in the second quarter of 2010 which is included in “Interest expense.”

Convertible Notes

On June 17, 2010, we repurchased the remaining 5% convertible notes (the “Convertible Notes”) for $2,109, including accrued interest. The Convertible Notes were repurchased at a price of 100% of their principal amount plus accrued interest.

 
6

 
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



 (5)  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:

   
July 4, 2010
 
   
Carrying Amount
   
Fair Value
 
             
Financial assets:
           
Cash and cash equivalents (a)
  $ 508,380     $ 508,380  
Restricted cash equivalents (a):
               
Current included in “Prepaid expenses and other current assets”
    1,013       1,013  
Non-current included in “Deferred costs and other assets”
    5,896       5,896  
Non-current cost investments (b)
    8,485       10,388  
Interest rate swaps (c)
    9,238       9,238  
Financial liabilities:
               
Long-term debt, including current portion:
               
10% Senior Notes (d)
  $ 552,500     $ 589,295  
Term Loan (d)
    497,514       499,500  
6.20% senior notes (d)
    215,151       230,625  
Sale-leaseback obligations (e)
    123,579       131,839  
Capitalized lease obligations (e)
    87,840       93,136  
7% Debentures (d)
    80,640       82,500  
6.54% Secured equipment term loan (e)
    13,215       13,520  
Other
    4,186       4,269  
Total long-term debt, including current portion
  $ 1,574,625     $ 1,644,684  
Guarantees of:
               
Lease obligations for restaurants not operated by the Company (f)
  $ 402     $ 402  
Wendy’s franchisee loans obligations (g)
  $ 1,060     $ 1,060  
 
 
 
(a)
The carrying amounts approximated fair value due to the short-term maturities of the cash equivalents or restricted cash equivalents.
 
(b)
These consist of investments in certain non-current cost investments. The fair values of these investments were based entirely on statements of account received from investment managers or investees which were principally based on quoted market or broker/dealer prices. To the extent that some of these investments, including the underlying investments in investment limited partnerships, do not have available quoted market or broker/dealer prices, the Company relied on valuations performed by the investment managers or investees in valuing those investments or third-party appraisals.
 
(c)
The fair values were based on information provided by the bank counterparties that is model-driven and whose inputs were observable or whose significant value drivers were observable.
 
(d)
The fair values were based on quoted market prices.
 
(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 U.S. Treasury bond yield for securities with similar durations.
 
(f)
The fair value was assumed to reasonably approximate the carrying amount since the carrying amount represented the fair value of these lease obligations.  We have accrued liabilities for these lease obligations based on a weighted average risk percentage.
 
(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, notes receivable and non-current notes receivable (included in “Deferred costs and other assets”) approximated fair value due to the effect of related allowances for doubtful accounts and notes receivable. The carrying amounts of accounts payable and accrued expenses approximated fair value due to the short-term maturities of those items.

 
7

 
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



Valuation techniques under the accounting guidance related to fair value measurements were based on observable and unobservable inputs.  Observable inputs reflected readily obtainable data from independent sources, while unobservable inputs reflected our market assumptions.  These inputs are classified into the following hierarchy:

Level 1 Inputs – Quoted prices for identical assets or liabilities in active markets.

Level 2 Inputs – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs – Pricing inputs are unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the assets or liabilities.  The inputs into the determination of fair value require significant management judgment or estimation.

The following table presents our financial assets and liabilities (other than cash and cash equivalents) measured at fair value on a recurring basis as of July 4, 2010 by the valuation hierarchy as defined in the fair value guidance:

   
July 4,
   
Fair Value Measurements
 
   
2010
   
Level 1
   
Level 2
   
Level 3
 
                         
Interest rate swaps (included in “Deferred costs and other assets”)
  $ 9,238     $ -     $ 9,238     $ -  


(6)
Impairment of Long-lived Assets

   
Three Months Ended
   
Six Months Ended
 
   
July 4,
   
June 28,
   
July 4,
   
June 28,
 
   
2010
   
2009
   
2010
   
2009
 
Arby’s restaurant segment:
                       
Impairment of Company-owned restaurants:
                       
Properties
  $ 1,672     $ 5,902     $ 12,361     $ 11,796  
Intangible assets
    260       371       1,172       938  
      1,932       6,273       13,533       12,734  
                                 
Wendy’s restaurant segment:
                               
Impairment of  Company-owned restaurants:
                               
Properties
    75       251       75       670  
Intangible assets
    407       -       407       -  
      482       251       482       670  
                                 
Corporate - aircraft
    -       2,176       -       2,176  
Total impairment of long-lived assets
  $ 2,414     $ 8,700     $ 14,015     $ 15,580  
 
 
The Arby’s Restaurant Group, Inc. (“Arby’s”) Company-owned restaurant segment impairment losses in each period predominantly reflected impairment charges on all restaurant level assets resulting from the deterioration in operating performance of certain restaurants and additional charges for capital improvements in restaurants impaired in a prior period which did not subsequently recover. For the three months and six months ended June 28, 2009, Arby’s impairment losses also included reductions in the carrying value of certain surplus properties. The Wendy’s restaurant segment impairment losses for the three months and six months ended July 4, 2010 and June 28, 2009 reflected (1) write-downs in the carrying value of certain surplus properties and properties held for sale and (2) write-downs in the carrying value of options to purchase property.

The Corporate impairment loss reflected the reduction of our carrying value of one of our corporate aircraft to its net realizable value based on the sale of this aircraft in July 2009.

 
8

 
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



 
All of these impairment losses represented the excess of the carrying amount 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 and Wendy’s restaurant segments were generally estimated based on the present values of the associated cash flows and on the market value with respect to land (Level 3 inputs).   There is no remaining carrying value of the properties and intangible assets which were measured at fair value as of July 4, 2010 and April 4, 2010.

(7)
 
Facilities Relocation and Corporate Restructuring

The Company incurred corporate restructuring charges in 2009, primarily related to severance as a result of the merger with Wendy’s (the “Wendy’s Merger”).  Such restructuring accrual, which is included in “Accrued expenses and other liabilities,” was $1,498 at July 4, 2010 and $5,630 at January 3, 2010. The reduction in this accrual during the six months ended July 4, 2010 reflects total payments of $4,168 partially offset by net adjustments of $36. We do not expect to incur any additional corporate restructuring charges with respect to the Wendy’s Merger.

(8)
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, net.”

Presented below is an unaudited summary of activity related to our portion of TimWen included in our Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations:

   
Six Months Ended
 
   
July 4, 2010
   
June 28, 2009
 
Balance at beginning of period
  $ 97,476     $ 89,771  
                 
Equity in earnings for the period
    5,913       4,958  
Amortization of purchase price adjustments
    (1,433 )     (1,315 )
      4,480       3,643  
                 
Distributions
    (5,793 )     (7,106 )
Currency translation adjustment included in “Comprehensive income”
    (592 )     5,255  
Balance at end of period (a)
  $ 95,571     $ 91,563  
______________________
 
(a)
Included in “Investments.”

 
9

 
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



Presented below is a summary of unaudited financial information of TimWen as of and for the six months ended July 4, 2010 and June 28, 2009, respectively, in Canadian dollars. The summary balance sheet financial information does not distinguish between current and long-term assets and liabilities:

   
July 4, 2010
   
June 28, 2009
 
   
(Canadian)
   
(Canadian)
 
Balance sheet information:
           
Properties
    C$     80,988       C$     85,232  
Cash and cash equivalents
    1,244       701  
Accounts receivable
    4,258       4,784  
Other
    3,621       2,310  
      C$     90,111       C$     93,027  
                 
Accounts payable and accrued liabilities
    C$       1,218       C$       1,774  
Other liabilities
    8,926       10,896  
Partners’ equity
    79,967       80,357  
      C$     90,111       C$     93,027  
                 

   
Six Months Ended
 
   
July 4, 2010
   
June 28, 2009
 
   
(Canadian)
   
(Canadian)
 
Income statement information:
           
Revenues
    C$     18,619       C$     18,762  
Income before income taxes and net income
    12,014       11,935  


(9)
Other Than Temporary Losses on Investments

Due to market conditions and other factors present during the six months ended June 28, 2009, we recorded other than temporary losses of $3,916 attributable primarily to the decline in fair value of three of our investments.

(10)
 
Income Taxes

The effective tax rate for the three months ended July 4, 2010 and June 28, 2009 was 42.1% and 36.5%, respectively.  The effective rates vary from the U.S. federal statutory rate of 35% due to the effect of (1) changes in our estimated full year tax rates, (2) state income taxes, net of federal income tax benefit, (3) non-deductible expenses, and (4) tax credits.

The effective tax rate for the six months ended July 4, 2010 and June 28, 2009 was 26.7% and 48.5%, respectively. The effective rates vary from the U.S. federal statutory rate of 35% due to the effect of (1) state income taxes, net of federal income tax benefit, (2) non-deductible expenses, (3) a reduction in our state valuation allowances in 2010, (4) adjustments to our uncertain tax positions, and (5) tax credits.

For the six months ended July 4, 2010 and June 28, 2009, we increased our unrecognized tax benefits for prior periods by $2,921 and $1,184, respectively.  Additionally, we increased interest on unrecognized tax benefits for these periods by $1,201 and $773, respectively.  There were no other significant changes to unrecognized tax benefits and related interest and penalties in the six months ended July 4, 2010 and June 28, 2009.

The Internal Revenue Service (the “IRS”) is currently conducting an examination of our 2010 and 2009 U.S. Federal income tax return years as part of the Compliance Assurance Process (“CAP”). As part of CAP, tax years are audited on a contemporaneous basis so that all or most issues are resolved prior to the filing of the tax return.  The Company participated in CAP beginning with the tax period ended December 28, 2008 and Wendy’s has been a participant since its 2006 tax year. Any matters relating to our December 28, 2008 U.S. Federal income tax return and 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 through September 29, 2008 are not currently under examination by the IRS. Our foreign income tax returns are open to examination primarily for periods ending on or after January 1, 2006. Certain of these foreign income tax returns and some of our state income tax returns are currently under examination. Certain of these

 
10

 
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



states have issued notices of proposed tax assessments aggregating $3,372. 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.

 
(11)
Income Per Share

Basic income per share is computed by dividing net income by the weighted average number of common shares outstanding.

Diluted income per share for the three months and six months ended July 4, 2010 and June 28, 2009 has been computed by dividing net income by the weighted average number of shares plus the potential common share effect of dilutive stock options and non-vested restricted common shares, both computed using the treasury stock method. For the three months and six months ended July 4, 2010, we excluded 15,796 and 16,048, respectively, of potential common shares from our diluted per share calculation as they would have had anti-dilutive effects. For the three months and six months ended  June 28, 2009, we excluded 24,178 and 20,648, respectively, of potential common shares from our diluted per share calculation as they would have had anti-dilutive effects.
 
As of July 4, 2010, our potential common shares consisted of (1) outstanding stock options which can be exercised into 22,295 shares of our Common Stock and (2) 1,412 unvested restricted shares of our Common Stock.
 
The weighted average number of shares used to calculate basic and diluted income per share are as follows:

   
Three Months Ended
   
Six Months Ended
 
   
July 4,
   
June 28,
   
July 4,
   
June 28,
 
   
2010
   
2009
   
2010
   
2009
 
Common Stock:
                       
Basic shares - weighted average
                       
     shares outstanding
    425,594       469,614       434,460       469,425  
        Dilutive effect of stock options
                               
             and restricted shares
    973       1,539       1,068       2,074  
Diluted shares
    426,567       471,153       435,528       471,499  

(12)
 
Stockholders’ Equity

The following is a summary of the changes in stockholders’ equity:

   
Six Months Ended
 
   
July 4,
   
June 28,
 
   
2010
   
2009
 
             
Balance, beginning of year
  $ 2,336,339     $ 2,383,445  
Comprehensive income (a)
    5,816       23,280  
Dividends paid
    (12,989 )     (14,073 )
Share-based compensation expense
    6,651       7,760  
Repurchases of common stock for treasury
    (167,744 )     -  
Other
    411       1,410  
Balance, end of period
  $ 2,168,484     $ 2,401,822  


 
11

 
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



(a) The following is a summary of the components of comprehensive income, net of income taxes:

   
Six Months Ended
 
   
July 4,
   
June 28,
 
   
2010
   
2009
 
             
Net income
  $ 7,342     $ 3,968  
Net change in currency translation adjustment
    (1,562 )     19,438  
Net unrealized losses on available-for-sale securities
    (59 )     (126 )
Net unrecognized pension loss
    95       -  
Other comprehensive (loss) income
    (1,526 )     19,312  
Comprehensive income
  $ 5,816     $ 23,280  

(13)
Business Segments

We manage and internally report our operations in two segments: (1) the operation and franchising of Wendy’s restaurants 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).

In the first quarter of 2009, Wendy’s/Arby’s charged the restaurant segments for certain corporate support services based upon budgeted segment revenues. Commencing with the second quarter of 2009, Wendy’s/Arby’s Restaurants established a shared service center in Atlanta and allocated all its operating costs to the restaurant segments based also on budgeted segment revenues.

 
12

 
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



The following is a summary of our segment information:

   
Three Months Ended
   
Six Months Ended
 
   
July 4, 2010
   
June 28, 2009
   
July 4, 2010
   
June 28, 2009
 
Revenues:
                       
Sales (1):
                       
Wendy's
  $ 532,411     $ 539,123     $ 1,045,158     $ 1,046,126  
Arby's
    250,272       277,072       485,722       543,312  
Total
    782,683       816,195       1,530,880       1,589,438  
Franchise revenues:
                               
Wendy's
    75,023       76,055       146,990       147,293  
Arby's
    19,315       20,437       36,598       39,940  
Total
    94,338       96,492       183,588       187,233  
Total revenues:
                               
Wendy's
    607,434       615,178       1,192,148       1,193,419  
Arby's
    269,587       297,509       522,320       583,252  
Total
  $ 877,021     $ 912,687     $ 1,714,468     $ 1,776,671  
                                 
Depreciation and amortization:
                               
Wendy's
  $ 27,861     $ 28,608     $ 56,656     $ 65,295  
Arby's
    13,563       13,621       27,457       28,138  
Corporate
    3,520       2,458       7,157       2,916  
Total
  $ 44,944     $ 44,687     $ 91,270     $ 96,349  
                                 
Impairment of long-lived assets:
                               
Wendy's
  $ 482     $ 251     $ 482     $ 670  
Arby's
    1,932       6,273       13,533       12,734  
Corporate
    -       2,176       -       2,176  
Total
  $ 2,414     $ 8,700     $ 14,015     $ 15,580  
                                 
Segment operating profit (loss):
                               
Wendy's
  $ 72,128     $ 65,499     $ 124,528     $ 85,524  
Arby's
    6,013       6,959       (14,962 )     4,912  
Corporate
    (5,478 )     (15,951 )     (10,570 )     (19,995 )
Total
    72,663       56,507       98,996       70,441  
                                 
Unallocated items:
                               
Interest expense
    (34,389 )     (31,065 )     (70,667 )     (53,214 )
Loss on early extinguishment of debt
    (26,197 )     -       (26,197 )     -  
Investment income (expense), net
    5,049       (2,793 )     5,179       (4,587 )
Other than temporary losses on investments
    -       (789 )     -       (3,916 )
Other income (expense), net
    1,428       1,581       2,706       (1,016 )
Income before income taxes
    18,554       23,441       10,017       7,708  
Provision for income taxes
    (7,812 )     (8,549 )     (2,675 )     (3,740 )
Net income
  $ 10,742     $ 14,892     $ 7,342     $ 3,968  
                                 
Cash capital expenditures:
                 
Six Months Ended July 4, 2010
   
Six Months Ended June 28, 2009
 
Wendy's
                  $ 29,699     $ 16,585  
Arby's
                    15,114       15,861  
Corporate (2)
                    7,917       7,569  
Total
                  $ 52,730     $ 40,015  
_______________
(1) Sales includes sales of bakery items and kids’ meal promotion items sold to franchisees.
(2) The corporate capital expenditures are primarily related to our shared services center.

 
13

 
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)




There have been no material changes in total assets by segment since January 3, 2010.

(14)
 
Transactions with Related Parties

Wendy’s/Arby’s has entered into the following new or revised transactions with related parties since those reported in our Form 10-K:

Services Agreement

Wendy’s/Arby’s and the management company formed by certain former executives and a director, (the “Management Company”), entered into a services agreement (the “Services Agreement”) which commenced on July 1, 2009 and will continue until June 30, 2011, unless sooner terminated. Under the Services Agreement, the Management Company will assist us with strategic merger and acquisition consultation, corporate finance and investment banking services and related legal matters. During the second quarter of 2010, in addition to the regular quarterly fee to the Management Company, we paid the Management Company $2,465 in fees for corporate finance advisory services in connection with the negotiation and execution of the Credit Agreement.

Sublease of New York Office Space

In July 2007, the Company entered into an agreement under which the Management Company is subleasing the office space on one of the floors of the Company’s former New York headquarters.   During the second quarter of 2010, the Company and the Management Company entered into an amendment to the sublease, effective April 1, 2010, pursuant to which the Management Company’s early termination right was cancelled in exchange for a reduction in rent.  Under the terms of the amended sublease, the sublease is not cancelable prior to the expiration of the prime lease and the Management Company pays rent to the Company in an amount that covers substantially all of the Company’s rent obligations under the prime lease for such space.

Aircraft Agreement

On June 10, 2009, the Company entered into a lease of one of its corporate aircraft to TASCO LLC, an affiliate of the Management Company.  On June 24, 2010, the Company and TASCO LLC entered into an agreement to renew the lease for an additional one year period (expiring June 30, 2011) on the same terms and conditions as the expiring lease.

Strategic Sourcing Group Agreement

On April 5, 2010, the Wendy’s independent purchasing cooperative Quality Supply Chain Co-op (“QSCC”) and the Arby’s independent purchasing cooperative (“ARCOP”), in consultation with Wendy’s/Arby’s Restaurants, established the Strategic Sourcing Group Co-op, LLC (the “SSG”). The SSG was formed to manage and operate purchasing programs which combine the purchasing power of both Wendy’s and Arby’s Company-owned and franchised restaurants to create buying efficiencies for certain non-perishable goods, equipment and services utilized by both brands.

In order to facilitate the orderly transition of this purchasing function for the Company’s North American operations, Wendy’s/Arby’s Restaurants transferred certain contracts, assets and certain Wendy’s/Arby’s Restaurants purchasing employees to the SSG in the second quarter of 2010. Wendy’s/Arby’s Restaurants has committed to pay approximately $4,900 of expenses of the SSG, which was expensed in the first quarter of 2010 and included in “General and administrative,” and will be paid over a 24 month period.  The SSG is exploring various alternatives for its sources of funding for future operations. Effective April 5, 2010, the SSG leased 2,300 square feet of office space from Arby’s until December 31, 2016 unless terminated earlier for an annual base rental of $51.

(15)
 
Legal and Environmental Matters

We are involved in litigation and claims incidental to our current and prior businesses.  We have reserves for all of our legal and environmental matters aggregating $6,073 as of July 4, 2010.  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

 
WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)



(16)          Accounting Standards

Accounting Standards Adopted During 2010

In June 2009, the Financial Accounting Standards Board (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 was effective commencing with our 2010 fiscal year. The adoption of this guidance did not have an impact on our consolidated financial statements.

In January 2010, the FASB issued amendments to the existing fair value measurements and disclosures guidance which requires new disclosures and clarifies existing disclosure requirements. The purpose of these amendments is to provide a greater level of disaggregated information as well as more disclosure around valuation techniques and inputs to fair value measurements.  The guidance was effective commencing with our 2010 fiscal year. The adoption of this guidance did not have a significant impact on our consolidated financial statements.

Accounting Standards Not Yet Adopted

In July 2010, the FASB issued amendments to the existing financing receivables guidance which increases disclosures that entities must make about the credit quality of financing receivables and the allowance for credit losses. The purpose of these amendments is to provide financial statement users with greater transparency about the entities’ allowance for credit losses and the credit quality of its financing receivables.  The guidance is effective commencing with our annual report on Form 10-K for the fiscal year ending January 2, 2011. The adoption of this standard is not expected to have an effect on our consolidated financial statements.

 
15

 

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 Group, Inc. (“Wendy’s/Arby’s” and, together with its subsidiaries, the “Company” or “we”) should be read in conjunction with our accompanying unaudited condensed consolidated financial statements included elsewhere herein and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended January 3, 2010 (the “Form 10-K”).  There have been no significant changes as of July 4, 2010 to the application of our critical accounting policies as described in Item 7 of our Form 10-K.  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 consolidated financial statements, related notes, and other financial information appearing elsewhere in this report, our Form 10-K and our other filings with the Securities and Exchange Commission.

Introduction and Executive Overview

Our Business

Wendy’s/Arby’s is the parent company of its wholly-owned subsidiary holding company Wendy’s/Arby’s Restaurants, LLC (“Wendy’s/Arby’s Restaurants”). Wendy’s/Arby’s Restaurants is the parent company of Wendy’s International, Inc. (“Wendy’s”) and Arby’s Restaurant Group, Inc. (“Arby’s” or “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.  References in this Form 10-Q to restaurants that we “own” or that are “company-owned” include owned and leased restaurants that we operate through our subsidiaries.  As of July 4, 2010, the Wendy’s restaurant system was comprised of 6,546 restaurants, of which 1,391 were owned and operated by the Company. As of July 4, 2010, the Arby’s restaurant system was comprised of 3,685 restaurants, of which 1,152 were owned and operated by the Company. The 2,543 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”).

Wendy’s and Arby’s revenues and operating results have been impacted by a number of factors, including declining sales and traffic trends in the restaurant industry, high unemployment, negative general economic trends and intense price competition.

We remain committed to investing in long-term growth opportunities for our brands. Our Wendy’s initiatives include (1) our breakfast program, (2) our remodeling program, and (3) a comprehensive pricing initiative that should further improve sales and margins. Our Arby’s initiatives, which are being led by our new brand President, include (1) our value strategy, which includes our everyday affordability proposition, (2) our remodeling program, and (3) the ongoing validation of our brand positioning.  In addition, we are aggressively pursuing international development opportunities for both brands.

As of July 4, 2010, there were approximately 310 Arby’s franchised restaurants with amounts payable to our subsidiary ARG for royalties, rent and/or other fees that were at least 60 days past due. The financial condition of a number of Arby’s franchisees was one of the factors that resulted in a net decrease of 31 and 16 in the number of franchised restaurants for fiscal 2009 and for the six months ended July 4, 2010, respectively.  During those periods 74 and 50 franchised Arby’s restaurants were closed, respectively.  The trend of declining sales at franchised restaurants has resulted in decreases in royalties and other franchise revenues. In addition, Arby’s franchisee accounts receivable and related allowance for doubtful accounts have increased significantly, and may continue to grow, as a result of the deteriorating financial condition of some of our franchisees. Franchisees’ financial difficulties and the closure of franchised restaurants have also caused reductions in the contributions to and extent of national and local advertising programs.  Continuation of these trends will further affect our revenues and may have a material adverse effect on our results of operations and financial condition.

AFA Service Corporation (“AFA”), an independently controlled advertising cooperative in which we have voting interests of less than 50%, had previously entered into a revolving loan agreement with ARG pursuant to which ARG provides revolving loans up to $11.0 million.  As of July 4, 2010, the outstanding balance under this agreement was $9.0 million and there were no amounts past due.  Due to declining sales and profitability of Arby’s franchisees, it is possible that our ability in the future to collect principal and interest payments from AFA could be adversely affected.

Restaurant business revenues for 2010 first half include: (1) $1,480.9 million of sales from Company-owned restaurants, (2) $50.0 million from the sale of bakery items and kids’ meal promotion items to our franchisees, (3) $170.8 million of royalty income from franchisees and (4) $12.8 million of other franchise-related revenue and other revenues. All of our Wendy’s and most of our Arby’s royalty agreements provided for royalties of 4.0% of franchise revenues for the six months ended July 4, 2010.

 
16

 

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 less cost of sales divided by sales from Company-owned restaurants. Cost of sales includes food and paper, restaurant labor, and occupancy, advertising and other operating costs.  Sales and cost of sales exclude amounts related to bakery items and kids’ meal promotion items sold 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.

DFR Notes

On June 9, 2010, pursuant to a March 2010 agreement between the Company and Deerfield Capital Corp. (“DFR”), we received cash proceeds of $31.3 million, including interest, in consideration for the repayment and cancellation of the series A senior notes (the “DFR Notes”) we received in December 2007 in connection with the sale of Deerfield & Company (the “Deerfield Sale”) to DFR.  Additional information on the DFR Notes and the Deerfield Sale is discussed in our Form 10-K. The proceeds represented 64.1% of the $48.0 million aggregate principal amount of the DFR Notes.

During the fourth quarter of 2008, we recognized an allowance for collectability of $21.2 million to reduce the then carrying amount of the notes to $25.0 million. As a result, we recognized income of $4.9 million during the three months and six months ended July 4, 2010, as the repayment proceeds exceeded the carrying value of the DFR Notes.  This gain is included in “Investment income (expense), net.”

Credit Agreement

As further described in “Liquidity and Capital Resources – Long-term Debt – Credit Agreement,” below, on May 24, 2010, Wendy’s/Arby’s Restaurants, a direct wholly-owned subsidiary of the Company, entered into a $650.0 million Credit Agreement (the “Credit Agreement”), which includes a $500.0 million senior secured term loan facility (the “Term Loan”) and a $150.0 million senior secured revolving credit facility (the “Credit Facility”).

The Company recognized a loss on early extinguishment of debt of $26.2 million in the second quarter of 2010 related to the use of proceeds from the Term Loan. This loss consisted of (1) a $15.0 million premium payment required to redeem the Wendy’s 6.25% senior notes, (2) $5.5 million for the write-off of the unaccreted discount of the Wendy’s 6.25% senior notes (recorded in connection with the Wendy’s merger), and (3) $5.7 million for the write-off of deferred costs associated with the repayment of the prior senior secured term loan.

Related Party Transactions

Wendy’s/Arby’s has entered into the following new or revised transactions with related parties since those reported in our Form 10-K:

Services Agreement

Wendy’s/Arby’s and the management company formed by certain former executives and a director, (the “Management Company”), entered into a services agreement (the “Services Agreement”) which commenced on July 1, 2009 and will continue until June 30, 2011, unless sooner terminated. Under the Services Agreement, the Management Company will assist us with strategic merger and acquisition consultation, corporate finance and investment banking services and related legal matters. During the second quarter of 2010, in addition to the regular quarterly fee to the Management Company, we paid the Management Company $2.5 million in fees for corporate finance advisory services in connection with the negotiation and execution of the Credit Agreement.

Sublease of New York Office Space

In July 2007, the Company entered into an agreement under which the Management Company is subleasing the office space on one of the floors of the Company’s former New York headquarters.  During the second quarter of 2010, the Company and the Management

 
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Company entered into an amendment to the sublease, effective April 1, 2010, pursuant to which the Management Company’s early termination right was cancelled in exchange for a reduction in rent.  Under the terms of the amended sublease, the sublease is not cancelable prior to the expiration of the prime lease and the Management Company pays rent to the Company in an amount that covers substantially all of the Company’s rent obligations under the prime lease for such space.

Aircraft Agreement

On June 10, 2009, the Company entered into a lease of one of its corporate aircraft to TASCO LLC, an affiliate of the Management Company.  On June 24, 2010, the Company and TASCO LLC entered into an agreement to renew the lease for an additional one year period (expiring June 30, 2011) on the same terms and conditions as the expiring lease.

Strategic Sourcing Group Agreement

On April 5, 2010, the Wendy’s independent purchasing cooperative Quality Supply Chain Co-op (“QSCC”) and the Arby’s independent purchasing cooperative (“ARCOP”), in consultation with Wendy’s/Arby’s Restaurants, established the Strategic Sourcing Group Co-op, LLC (the “SSG”). The SSG was formed to manage and operate purchasing programs which combine the purchasing power of both Wendy’s and Arby’s Company-owned and franchised restaurants to create buying efficiencies for certain non-perishable goods, equipment and services utilized by both brands.

In order to facilitate the orderly transition of this purchasing function for the Company’s North American operations, Wendy’s/Arby’s Restaurants transferred certain contracts, assets and certain Wendy’s/Arby’s Restaurants purchasing employees to the SSG in the second quarter of 2010. Wendy’s/Arby’s Restaurants has committed to pay approximately $4.9 million of expenses of the SSG, which was expensed in the first quarter of 2010 and included in “General and administrative,” and will be paid over a 24 month period.  The SSG is exploring various alternatives for its sources of funding for future operations. Effective April 5, 2010, the SSG leased 2,300 square feet of office space from Arby’s until December 31, 2016 unless terminated earlier for an annual base rental of less than $0.1 million.

Presentation of Financial Information

We report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to December 31.  Our 2009 fiscal year contained 53 weeks with the fiscal fourth quarter containing 14 weeks. All quarters presented contain 13 weeks. All references to years and quarters relate to fiscal periods rather than calendar periods.  Certain percentage changes between these years are considered not measurable or not meaningful (“n/m”).

 
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Results of Operations

Three Months Ended July 4, 2010 Compared with Three Months Ended June 28, 2009

   
Three Months Ended
 
   
July 4,
   
June 28,
     $       %  
   
2010
   
2009
   
Change
   
Change
 
   
(In Millions)
         
Revenues:
                         
Sales
  $ 782.7     $ 816.2     $ (33.5 )     (4.1)%  
Franchise revenues
    94.3       96.5       (2.2 )     (2.3)  
      877.0       912.7       (35.7 )     (3.9)  
Costs and expenses:
                               
Cost of sales
    659.1       686.5       (27.4 )     (4.0)  
General and administrative
    97.5       112.7       (15.2 )     (13.5)  
Depreciation and amortization
    44.9       44.7       0.2       0.5  
Impairment of long-lived assets
    2.4       8.7       (6.3 )     (72.4)  
Facilities relocation and corporate restructuring
    -       3.0       (3.0 )     (100.0)  
Other operating expense, net
    0.4       0.6       (0.2 )     (33.3)  
      804.3       856.2       (51.9 )     (6.1)  
Operating profit
    72.7       56.5       16.2       28.7  
Interest expense
    (34.4 )     (31.1 )     (3.3 )     10.6  
Loss on early extinguishment of debt
    (26.2 )     -       (26.2 )     100.0  
Investment income (expense), net
    5.0       (2.8 )     7.8       n/m  
Other than temporary losses on investments
    -       (0.8 )     0.8       (100.0)  
Other income, net
    1.4       1.6       (0.2 )     (12.5)  
Income before income taxes
    18.5       23.4       (4.9 )     (20.9)  
Provision for income taxes
    (7.8 )     (8.5 )     0.7       (8.2)  
Net income
  $ 10.7     $ 14.9     $ (4.2 )     (28.2)%  


 
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Restaurant statistics:
                 
Wendy’s same-store sales:
 
Second Quarter 2010
   
Second Quarter 2009
       
North America Company-owned restaurants
    (2.9)%       (1.2)%        
North America franchised restaurants
    (1.4)%       (0.1)%        
North America system wide
    (1.7)%       (0.4)%        
                       
Arby’s same-store sales:
                     
North America Company-owned restaurants
    (8.8)%       (5.8)%        
North America franchised restaurants
    (6.7)%       (7.4)%        
North America system wide
    (7.4)%       (6.9)%        
                       
Sales:
                     
Wendy’s
  $ 506.2     $ 514.7        
Arby’s
    250.3       277.1        
Bakery and kid’s meal promotion items to franchisees
    26.2       24.4        
Total sales
  $ 782.7     $ 816.2        
                       
Company restaurant margin $
                     
Wendy’s
  $ 83.2     $ 82.1        
Arby’s
    33.5       41.3        
Consolidated
  $ 116.7     $ 123.4        
                       
Company restaurant margin %
                     
Wendy’s
    16.4%       15.9%        
Arby’s
    13.4%       14.9%        
Consolidated
    15.4%       15.6%        
                       
Restaurant count:
 
Company-owned
   
Franchised
   
System Wide
 
Wendy’s restaurant count:
                     
Restaurant count at April 4, 2010
    1,390       5,150       6,540  
Opened
    3       14       17  
Closed
    -       (11 )     (11 )
Sold to franchisees
    (2 )     2       -  
Restaurant count at July 4, 2010
    1,391       5,155       6,546  
                         
Arby’s restaurant count:
                       
Restaurant count at April 4, 2010
    1,155       2,544       3,699  
Opened
    -       14       14  
Closed
    (3 )     (25 )     (28 )
Restaurant count at July 4, 2010
    1,152       2,533       3,685  
Total Wendy’s/Arby’s restaurant count at July 4, 2010
    2,543       7,688       10,231  

 
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Sales
     
   
Change
 
   
(In Millions)
 
       
Wendy’s
  $ (8.5 )
Arby’s
    (26.8 )
Bakery and kids' meal promotion items to franchisees
    1.8  
    $ (33.5 )

The overall decrease in sales was primarily due to the decline in Wendy’s and Arby’s North America Company-owned same-store sales, which were down 2.9% and 8.8%, respectively.  Wendy’s and Arby’s North America Company-owned same-store sales were impacted by (1) the negative economic trends and competitive pressures described above and in our Form 10-K, as well as (2) the negative industry-wide restaurant trends that continued in the 2010 second quarter.  Wendy’s North America Company-owned same-store sales were also negatively impacted by a reduction in national advertising exposure in the second quarter of 2010 as compared to the second quarter of 2009. Wendy’s has reallocated a portion of its 2010 national advertising expenditure to the second half of the year in connection with new product introductions. The negative factors impacting Wendy’s sales were partially offset by the effect of an approximate 1% blended price increase taken in late 2009. Foreign currency translation had a $7.2 million positive impact on Wendy’s second quarter 2010 sales as compared to the 2009 second quarter.  Wendy’s locations sold during or subsequent to the 2009 second quarter generated $2.6 million of sales in that 2009 period. Arby’s North America Company-owned same-store sales were impacted by (1) a decrease of approximately 1.7% due to certain in-store value promotions in the 2009 second quarter which did not recur in the 2010 second quarter and (2) a decrease in advertising expenditures in the 2010 second quarter as compared to the 2009 second quarter. Arby’s has reallocated some of its advertising expenditures to the second half of 2010 in connection with its sales initiatives. Customer transaction volume in Arby’s North America Company-owned stores was virtually unchanged in the 2010 second quarter as compared to the 2009 second quarter, and transaction trends have improved significantly since the end of 2009 primarily as a result of the introduction of Arby’s everyday value strategy.

Franchise Revenues
     
   
Change
 
   
(In Millions)
 
       
Wendy’s
  $ (1.1 )
Arby’s
    (1.1 )
    $ (2.2 )

The overall decrease in franchise revenues was primarily due to the decline in Wendy’s and Arby’s North America franchised restaurant same-store sales, which were down 1.4% and 6.7%, respectively.  Wendy’s North America franchised restaurant same-store sales were impacted by the same factors described above for Wendy’s Company-owned restaurants, although we believe certain franchised restaurants mitigated some of the decline in same-store sales through greater price increases than those taken by Wendy’s Company-owned restaurants. Arby’s North America franchised restaurant same-store sales were impacted by the same factors described above for Arby’s Company-owned restaurants, although Arby’s North America franchised restaurants offered fewer in-store value promotions during the 2009 second quarter, which lessened the negative impact on franchised restaurant same-store sales for the three months ended July 4, 2010.

Restaurant Margin
Amount
 
Change
       
Wendy’s
16.4%
 
 0.5  % points
Arby’s
13.4%
 
(1.5) % points
Consolidated
15.4%
 
(0.2) % points

The increase in Wendy’s restaurant margin in the 2010 second quarter as compared to the 2009 second quarter was attributable to (1) a 1.3% point decrease in restaurant labor costs primarily due to a reduction in comparable incentive payments, (2) a 0.6% point benefit from price increases taken in 2009, a portion of which directly offset the increase in commodity costs mentioned below, and (3) the effect of ongoing operational improvements.  These positive impacts on restaurant margin were partially offset by (1) a 0.9% point increase in commodity costs, a portion of which was due to product improvements, and (2) the deleverage effect of the decline in Wendy’s same-store sales for the comparable quarter on controllable costs.  The Arby’s restaurant margin decreased approximately 2.8% points due to the deleverage effect of the decline in Arby’s same-store sales for the comparable quarters without similar reductions in fixed and semi-variable costs.  The decrease in Arby’s restaurant margin was partially offset by a 1.6% point decline in advertising expenditures.  In addition, increases in the cost of commodities were more than offset by changes in our promotional activities in the second quarter of 2010 as compared to the second quarter of 2009.
 
 
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General and Administrative
     
   
Change
 
   
(In Millions)
 
       
Incentive compensation
  $ (5.6 )
Compensation
    (3.4 )
Integration costs
    (3.4 )
Services agreement
    (1.4 )
Severance
    1.6  
Other, net
    (3.0 )
    $ (15.2 )

The decrease in general and administrative expenses was primarily related to: (1) reductions in incentive compensation accruals due to lower operating performance as compared to plan in 2010 versus 2009, (2) reductions in staffing at our shared services center in Atlanta, Georgia, (3) decreases in Wendy’s–related integration costs resulting from the completion of integration efforts in early 2010, and (4) decreases in fees under our related party services agreement that was renegotiated in June 2009.  These decreases were partially offset by severance costs related to the termination of certain senior Arby’s executives.

Depreciation and Amortization
     
   
Change
 
   
(In Millions)
 
       
Wendy’s restaurants, primarily properties
  $ (0.7 )
Arby’s restaurants, primarily properties
    (0.1 )
General corporate
    1.0  
    $ 0.2  

The increase in depreciation and amortization was primarily related to increases in the amortization of software and related costs capitalized in connection with the establishment of the shared services center at the Company’s corporate headquarters in Atlanta, Georgia. On a consolidated basis, this increase was partially offset by a reduction in depreciation related to Wendy’s and Arby’s previously impaired long-lived assets.

Impairment of Long-Lived Assets
     
   
Change
 
   
(In Millions)
 
       
Wendy’s restaurants, intangibles and surplus properties
  $ 0.2  
Arby’s restaurants, primarily properties at underperforming locations
    (4.3 )
Corporate - aircraft
    (2.2 )
    $ (6.3 )

The decrease in impairment of long-lived assets was primarily related to a decline in Arby’s Company-owned restaurants impairment losses due to the level of impairment charges taken in prior periods.  The decrease was also impacted by the impairment of one of our corporate aircraft classified as held for sale in the 2009 second quarter which was subsequently sold in July 2009.

Interest Expense
     
   
Change
 
   
(In Millions)
 
       
10% Senior Notes
  $ 14.3  
Amortization of deferred financing costs
    (6.1 )
Wendy’s interest rate swaps
    (3.3 )
Other
    (1.6 )
    $ 3.3  

The increase in interest expense was principally affected by interest on the $565.0 million principal amount of Wendy’s/Arby’s Restaurants 10% Senior Notes issued in June 2009, partially offset by the effect of the 2009 second quarter write-off of deferred debt costs

 
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relating to prepayments on the term loan under the prior Arby’s credit agreement. In addition, there was a favorable impact of interest rate swaps on the Wendy’s 6.20% and 6.25% senior notes entered into during 2009 and 2010. This favorable impact included a $1.9 million gain on the cancellation of the swaps related to the Wendy’s 6.25% senior notes in connection with their redemption in the second quarter of 2010.

Loss on Early Extinguishment of Debt

The loss on early extinguishment of debt of $26.2 million consisted of (1) a $15.0 million premium payment required to redeem the Wendy’s 6.25% senior notes as discussed above in “Introduction and Executive Overview – Credit Agreement,” (2) $5.5 million for the write-off of the unaccreted discount of the Wendy’s 6.25% senior notes (recorded in connection with the Wendy’s merger), and (3) $5.7 million for the write-off of deferred costs associated with the repayment of the Wendy’s/Arby’s Restaurants prior senior secured term loan as discussed below in “Liquidity and Capital Resources – Long-term Debt – Credit Agreement.”

Investment Income (Expense), Net
     
   
Change
 
   
(In Millions)
 
       
DFR Notes
  $ 4.9  
Early withdrawal fee
    5.5  
Recognized net gains
    (3.0 )
Other
    0.4  
    $ 7.8  

The increase in investment income primarily related to (1) the recognition of income on the DFR Notes as discussed above in “Introduction and Executive Overview – DFR Notes,” and (2) an early withdrawal fee incurred in the 2009 second quarter which did not recur in the 2010 second quarter.  These increases were partially offset by net investment gains recognized in the prior year quarter that did not recur in the 2010 second quarter. As of July 4, 2010, our investments include a joint venture investment and certain cost investments.

Other Than Temporary Losses on Investments

Due to market conditions and other factors present during the 2009 second quarter, we recorded other than temporary losses of $0.8 million attributable primarily to the decline in fair value of two of our cost investments. We did not recognize any other than temporary losses on our remaining investments during the 2010 second quarter.

Provision for Income Taxes
 
   
Change
 
   
(In Millions)
 
Federal and state provision on variance in income before income taxes
  $ (0.9 )
Other
    0.2  
    $ (0.7 )

Our income taxes were impacted by variations in income before income taxes.


 
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Results of Operations

Six Months Ended July 4, 2010 Compared with Six Months Ended June 28, 2009

   
Six Months Ended
 
   
July 4,
   
June 28,
     $       %  
   
2010
   
2009
   
Change
   
Change
 
   
(In Millions)
         
Revenues:
                         
Sales
  $ 1,530.9     $ 1,589.4     $ (58.5 )     (3.7)%  
Franchise revenues
    183.6       187.3       (3.7 )     (2.0)  
      1,714.5       1,776.7       (62.2 )     (3.5)  
Costs and expenses:
                               
Cost of sales
    1,300.5       1,362.4       (61.9 )     (4.5)  
General and administrative
    208.0       222.6       (14.6 )     (6.6)  
Depreciation and amortization
    91.3       96.3       (5.0 )     (5.2)  
Impairment of long-lived assets
    14.0       15.6       (1.6 )     (10.3)  
Facilities relocation and corporate restructuring
    -       7.2       (7.2 )     (100.0)  
Other operating expense, net
    1.7       2.2       (0.5 )     (22.7)  
      1,615.5       1,706.3       (90.8 )     (5.3)  
Operating profit
    99.0       70.4       28.6       40.6  
Interest expense
    (70.7 )     (53.2 )     (17.5 )     32.9  
Loss on early extinguishment of debt
    (26.2 )     -       (26.2 )     100.0  
Investment income (expense), net
    5.2       (4.6 )     9.8       n/m  
Other than temporary losses on investments
    -       (3.9 )     3.9       (100.0)  
Other income (expense), net
    2.7       (1.0 )     3.7       n/m  
Income before income taxes
    10.0       7.7       2.3       29.9  
Provision for income taxes
    (2.7 )     (3.7 )     1.0