form10-k_031309.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(X)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE
FISCAL YEAR ENDED DECEMBER 28, 2008
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
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WENDY’S/ARBY’S
GROUP, INC.
(Exact
Name of Registrant as Specified in its Charter)
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Delaware
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38-0471180
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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1155
Perimeter Center West, Atlanta, Georgia
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30338
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant's
Telephone Number, Including Area Code: (678) 514-4100
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Securities
Registered Pursuant to Section 12(b) of the Act:
Title
of Each Class
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Name
of Each Exchange on Which Registered
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Class
A Common Stock, $.10 par value
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New
York Stock Exchange
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Securities
Registered Pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. ýYes □No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act □Yes ýNo
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. ýYes □No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. □
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
definitions of "large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer □
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Accelerated
filer ý
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Non-accelerated
filer □
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Smaller
reporting company □
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). □Yes ýNo
The
aggregate market value of the registrant’s common equity held by non-affiliates
of the registrant as of June 29, 2008 was approximately
$414,171,684. As of February 27, 2009, there were 469,236,315 shares
of the registrant's Class A Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The
information required by Part III of this Form 10-K, to the extent not set forth
herein, is incorporated herein by reference from the registrant’s definitive
proxy statement to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A not later than 120 days after December 28, 2008.
PART
1
Special
Note Regarding Forward-Looking Statements and Projections
Effective
September 29, 2008, in conjunction with the merger with Wendy’s International,
Inc. (“Wendy’s”), the corporate name of Triarc Companies, Inc. (“Triarc”)
changed to Wendy’s/Arby’s Group, Inc. (“Wendy’s/Arby’s” or, together with its
subsidiaries, the “Company” or “we”). This Annual Report on Form 10-K
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:
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·
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competition,
including pricing pressures, aggressive marketing and the potential impact
of competitors’ new unit openings on sales of Wendy’s® and
Arby’s®
restaurants;
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·
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consumers’
perceptions of the relative quality, variety, affordability and value of
the food products we offer;
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·
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success
of operating initiatives, including advertising and promotional efforts
and new product and concept development by us and our
competitors;
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·
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development
costs, including real estate and construction
costs;
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·
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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;
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·
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certain
factors affecting our franchisees, including the business and financial
viability of key franchisees, the timely payment of such franchisees’
obligations due to us, 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;
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·
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availability,
location and terms of sites for restaurant development by us and our
franchisees;
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·
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delays
in opening new restaurants or completing remodels of existing
restaurants;
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·
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the
timing and impact of acquisitions and dispositions of
restaurants;
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·
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our
ability to successfully integrate acquired restaurant
operations;
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·
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anticipated
or unanticipated restaurant closures by us and our
franchisees;
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·
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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;
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·
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availability
of qualified restaurant personnel to us and to our franchisees, and the
ability to retain such personnel;
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·
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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;
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·
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changes
in commodity costs (including beef and chicken), labor, supply, fuel,
utilities, distribution and other operating
costs;
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·
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availability
and cost of insurance;
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· adverse
weather conditions;
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availability,
terms (including changes in interest rates) and deployment of
capital;
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·
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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 and taxation
legislation;
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·
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the
costs, uncertainties and other effects of legal, environmental and
administrative proceedings;
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·
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the
impact of general economic conditions on consumer spending, including a
slower consumer economy particularly in geographic regions that contain a
high concentration of Wendy’s or Arby’s restaurants, and the effects of
war or terrorist activities;
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·
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the
impact of our continuing investment in series A senior secured notes of
Deerfield Capital Corp. following our 2007 corporate restructuring;
and
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·
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other
risks and uncertainties affecting us and our subsidiaries referred to in
this Form 10-K (see especially “Item 1A. Risk Factors” and “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations”) and in our other current and periodic filings with the
Securities and Exchange Commission.
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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 Form
10-K 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.
Item
1. Business.
Introduction
We are
the parent company of Wendy’s International, Inc. (“Wendy’s”) and Arby’s
Restaurant Group, Inc. (“ARG”), which are the franchisors of the Wendy’s® and
Arby’s® restaurant systems. As of December 28, 2008, the Wendy’s
restaurant system was comprised of 6,630 restaurants, of which 1,406 were owned
and operated by the Company. As of December 28, 2008, the Arby’s
restaurant system was comprised of 3,756 restaurants, of which 1,176 were owned
and operated by the Company. References in this Form 10-K to
restaurants that we “own” or that are “company-owned” include owned and leased
restaurants. Our
corporate predecessor was incorporated in Ohio in 1929. We
reincorporated in Delaware in June 1994. Effective September 29,
2008, in conjunction with the merger with Wendy’s, our corporate name was
changed from Triarc Companies, Inc. (“Triarc”) to Wendy’s/Arby’s Group,
Inc. Our principal executive offices are located at 1155 Perimeter
Center West, Atlanta, Georgia 30338, and our telephone number is (678) 514-4100.
We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to such reports, as well as our annual proxy
statement, available, free of charge, on our website as soon as reasonably
practicable after such reports are electronically filed with, or furnished to,
the Securities and Exchange Commission. Our website address is
www.wendysarbys.com. Information contained on our website is not part
of this annual report on Form 10-K.
Merger
with Wendy’s
On
September 29, 2008, Triarc and Wendy’s completed their previously announced
merger (the “Wendy’s Merger”) in an all-stock transaction in which Wendy’s
shareholders received 4.25 shares of Wendy’s/Arby’s Class A common stock (the
“Class A Common Stock”) for each Wendy’s common share owned.
In the
Wendy’s Merger, approximately 377,000,000 shares of Wendy’s/Arby’s common stock
were issued to Wendy’s shareholders. The merger value of
approximately $2.5 billion for financial reporting purposes is based on the 4.25
conversion factor of the Wendy’s outstanding shares as well as previously issued
restricted stock awards both at a value of $6.57 per share which represents the
average closing market price of Triarc Class A Common Stock two days before and
after the merger announcement date of April 24, 2008. Wendy’s
shareholders held approximately 80%, in the aggregate, of Wendy’s/Arby’s
outstanding common stock immediately following the Wendy’s Merger. In
addition, effective on the date of the Wendy’s Merger, our Class B common stock
(the “Class B Common Stock”) was converted into Class A Common
Stock.
The
Wendy’s and Arby’s brands continue to operate independently, with headquarters
in Dublin, Ohio and Atlanta, Georgia, respectively. A consolidated support
center is based in Atlanta, Georgia and oversees all public company
responsibilities, as well as other shared service functions.
Business
Strategy
Our business
strategy is focused on growing same-store sales, restaurant margins and
operating income at
the Wendy’s and Arby’s brands with improved marketing, menu development,
restaurant operations and customer service. We are also focused on
effectively managing the integration of our brands and building a shared
services organization to achieve significant synergies and
efficiencies. Our goal is to produce consolidated revenue and
operating income growth with attractive return on investment, resulting in
increased shareholder value. We will also continue to evaluate
various acquisitions and business combinations in the restaurant industry, which
may result in increases in expenditures and related financing
activities. See “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.” Unless circumstances
dictate otherwise, it is our policy to publicly announce an acquisition or
business combination only after a definitive agreement with respect to such
acquisition or business combination has been reached.
On
November 1, 2005, Nelson Peltz, our Chairman and former Chief Executive Officer,
Peter W.
May, our Vice
Chairman and former President and Chief Operating Officer, and Edward P.
Garden, our Former Vice Chairman
and a member
of our Board of Directors (collectively, the “Principals”), started a
series of equity investment funds (the “Funds”) that are separate and distinct
from the Company and that are being managed by the Principals and certain other
former senior officers and former employees of the Company through a management
company (the “Management Company”) formed by the Principals. The
investment strategy of the Funds is to achieve capital appreciation by investing
in equity securities of publicly traded companies and effecting positive change
in those companies through active influence and involvement. Before
agreeing to acquire more than 50% of the outstanding voting securities of a
company in the quick service restaurant industry, the Principals have agreed to
offer us such acquisition opportunity, which may result in acquisition
opportunities being made available to us from time to time. See Note
27 to the Consolidated Financial Statements for additional information on our
agreements with the Management Company.
Fiscal
Year
We use a
52/53 week fiscal year convention whereby our fiscal year ends each year on the
Sunday that is closest to December 31 of that year. Wendy’s used the
same fiscal periods for all periods presented in this Form 10-K. Each
fiscal year generally is comprised of four 13-week fiscal quarters, although in
the years with 53 weeks, including 2009, the fourth quarter represents a 14-week
period.
Business
Segments
We
operate in two business segments, Wendy’s and Arby’s. See Note 30 of the
Financial Statements and Supplementary Data included in Item 8 herein, for
financial information attributable to our business segments.
The
Wendy’s Restaurant System
Wendy’s was incorporated
in 1969 under the laws of the State of Ohio. Wendy’s and its subsidiaries are
collectively referred to herein as “Wendy’s.” Wendy’s is the
3rd
largest restaurant franchising system specializing in the hamburger sandwich
segment of the quick service restaurant industry. According to Nation’s Restaurant News,
Wendy’s is the 4th largest
quick service restaurant chain in the United States.
Overview
Wendy’s is primarily engaged in the
business of operating, developing and franchising a system of distinctive
quick-service restaurants serving high quality food. At December 28, 2008,
there were 6,630 Wendy’s restaurants in operation in the United States and in 21
foreign countries and U. S. territories. Of these restaurants, 1,406 were
operated by Wendy’s and 5,224 by a total of 469
franchisees. See “Item 2. Properties” for a listing of
the number of Company-owned and franchised locations in the United States and in
foreign countries and U.S. territories.
The revenues from our restaurant
business are derived from four principal sources: (1) sales at company-owned
restaurants; (2) sales of bakery items and kid’s meal promotional items to
franchisees (3) franchise royalties received from all Wendy’s franchised
restaurants; and (4) up-front franchise fees from restaurant operators for each
new unit opened
Wendy’s
Restaurants
During
2008, Wendy’s opened 15 new restaurants and closed 16 generally underperforming
restaurants. In addition, Wendy’s disposed of 7 existing restaurants
to its franchisees. During 2008, Wendy’s franchisees opened 82 new restaurants
and closed 96 generally underperforming restaurants. You should read
the information contained in “Item 1A. Risk Factors—Our restaurant business is
significantly dependent on new restaurant openings, which may be affected by
factors beyond our control.”
The
following table sets forth the number of Wendy’s restaurants at the beginning
and end of each year from 2006 to 2008:
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2008
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2007
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2006
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Restaurants
open at beginning of period
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6,645 |
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6,673 |
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6,746 |
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Restaurants
opened during period
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97 |
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92 |
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122 |
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Restaurants
closed during period
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(112 |
) |
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(120 |
) |
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(195 |
) |
Restaurants
open at end of period
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6,630 |
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6,645 |
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6,673 |
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During the period from January 2,
2006, through December 28, 2008, 311 Wendy’s restaurants were opened and 427
generally underperforming Wendy’s restaurants were closed.
Operations
Each Wendy’s restaurant offers a
relatively standard menu featuring hamburgers and filet of chicken breast
sandwiches and wraps, which are prepared to order with the customer’s choice of
condiments. Wendy’s menu also includes chicken nuggets, chili, baked and French
fried potatoes, freshly prepared salads, soft drinks, milk, Frosty™ desserts,
floats and kids meals. In addition, the restaurants sell a variety of
promotional products on a limited basis.
Wendy’s strives to maintain quality and
uniformity throughout all restaurants by publishing detailed specifications for
food products, preparation and service, by continual in-service training of
employees, restaurant reviews and by field visits from Wendy’s supervisors. In
the case of franchisees, field visits are made by Wendy’s personnel who review
operations, including quality, service and cleanliness and make recommendations
to assist in compliance with Wendy’s specifications.
Generally,
Wendy’s does not sell food or supplies, other than sandwich buns and kids’ meal
toys, to its franchisees. However, Wendy’s has arranged for volume purchases of
many food and supply products. Under the purchasing arrangements, independent
distributors purchase certain products directly from approved suppliers and then
store and sell them to local company and franchised restaurants. These programs
help assure availability of products and provide quantity discounts, quality
control and efficient distribution. These advantages are available both to
Wendy’s and to its franchisees.
The New
Bakery Co. of Ohio, Inc. (“Bakery”), a wholly-owned subsidiary of Wendy’s, is a
producer of buns for some Wendy’s restaurants, and to a lesser extent for
outside parties. At December 28, 2008, the Bakery supplied 666 restaurants
operated by Wendy’s and 2,377 restaurants operated by franchisees. The Bakery
also manufactures and sells some products to customers in the grocery and food
service businesses.
See Note 30 of the Financial Statements
and Supplementary Data included in Item 8 herein, for financial information
attributable to certain geographical areas.
Raw
Materials
Wendy’s and its franchisees have not
experienced any material shortages of food, equipment, fixtures or other
products that are necessary to maintain restaurant operations. Wendy’s
anticipates no such shortages of products and believes that alternate suppliers
are available.
Trademarks
and Service Marks
Wendy’s has registered certain
trademarks and service marks in the United States Patent and Trademark Office
and in international jurisdictions, some of which include Wendy’s, Old Fashioned
Hamburgers® and Quality Is Our Recipe®. Wendy’s believes that these and other
related marks are of material importance to its business. Domestic trademarks
and service marks expire at various times from 2009 to 2018, while international
trademarks and service marks have various durations of 10 to 15 years. Wendy’s
generally intends to renew trademarks and service marks that are scheduled to
expire.
Wendy’s entered into an Assignment of
Rights Agreement with the company’s founder, R. David Thomas, and his wife dated
as of November 5, 2000 (the “Assignment”). Wendy’s had used
Mr. Thomas, who was Senior Chairman of the Board until his death on
January 8, 2002, as a spokesperson and focal point for its products and
services for many years. With the efforts and attributes of Mr. Thomas,
Wendy’s has, through its extensive investment in the advertising and promotional
use of Mr. Thomas’ name, likeness, image, voice, caricature, endorsement
rights and photographs (the “Thomas Persona”), made the Thomas Persona well
known in the U.S. and throughout North America and a valuable asset for both
Wendy’s and Mr. Thomas’ estate. Under the terms of the Assignment, Wendy’s
acquired the entire right, title, interest and ownership in and to the Thomas
Persona, including the sole and exclusive right to commercially use the Thomas
Persona.
Seasonality
Wendy’s restaurant operations are
moderately seasonal. Wendy’s average restaurant sales are normally higher during
the summer months than during the winter months. Because the business is
moderately seasonal, results for any quarter are not necessarily indicative of
the results that may be achieved for any other quarter or for the full fiscal
year.
Competition
Each Wendy’s restaurant is in
competition with other food service operations within the same geographical
area. The quick-service restaurant segment is highly competitive. Wendy’s
competes with other restaurant companies and food outlets, primarily through the
quality, variety, convenience, price and value perception of food products
offered. The number and location of units, quality and speed of service,
attractiveness of facilities, effectiveness of marketing and new product
development by Wendy’s and its competitors are also important factors. The price
charged for each menu item may vary from market to market (and within markets)
depending on competitive pricing and the local cost structure.
Wendy’s competitive position is
differentiated by a focus on quality, its use of fresh, never frozen ground beef
in North America and certain other countries, its unique and diverse menu,
promotional products, its wide choice of condiments and the atmosphere and decor
of its restaurants.
Quality
Assurance
Wendy’s Quality Assurance program is
designed to verify that the food products supplied to our restaurants are
processed in a safe, sanitary environment and in compliance with our food safety
and quality standards. Wendy’s Quality Assurance personnel conduct multiple
on-site sanitation and production audits throughout the year at all of our core
menu product processing facilities, which includes beef, poultry, pork, buns,
french fries, Frosty™ dessert ingredients, and produce. Animal welfare audits
are also conducted every year at all beef, poultry, and pork facilities to
confirm compliance to our required animal welfare and handling policies and
procedures. In addition to our facility audit program, weekly samples of beef,
poultry, and other core menu products from our distribution centers are randomly
sampled and analyzed by a third party laboratory to test conformance to our
quality specifications. Each year, Wendy’s representatives conduct unannounced
inspections of all company and franchise restaurants to test conformance to our
sanitation, food safety, and operational requirements. Wendy’s has the right to terminate
franchise agreements if franchisees fail to comply with quality
standards.
Acquisitions
and Dispositions of Wendy’s Restaurants
Wendy’s has from time to time acquired
the interests of and sold Wendy’s restaurants to franchisees, and it is
anticipated that the company may have opportunities for such transactions in the
future. Wendy’s generally retains a right of first refusal in connection with
any proposed sale of a franchisee’s interest. Wendy’s will continue to sell and
acquire restaurants in the future where prudent.
International
Operations
Wendy’s has 138 company owned and 235
franchised restaurants in Canada and 352 franchised restaurants in 20 other
countries and U.S. territories. Wendy’s is evaluating further expansion into
other international markets. Wendy’s has granted development rights for the
countries and U. S. territories listed under Item 2 of this Form
10-K.
Franchised
Restaurants
As of December 28, 2008, Wendy’s
franchisees operated 5,224 Wendy’s restaurants in 50 states, Canada and 20 other
countries and U. S. territories.
The rights and obligations governing
the majority of franchised restaurants operating in the United States are set
forth in the Wendy’s Unit Franchise Agreement. This document provides the
franchisee the right to construct, own and operate a Wendy’s restaurant upon a
site accepted by Wendy’s and to use the Wendy’s system in connection with the
operation of the restaurant at that site. The Unit Franchise Agreement provides
for a 20-year term and a 10-year renewal subject to certain conditions. Wendy’s
has in the past franchised under different agreements on a multi-unit basis;
however, Wendy’s now generally grants new Wendy’s franchises on a unit-by-unit
basis.
The Wendy’s Unit Franchise Agreement
requires that the franchisee pay a royalty of 4% of gross sales, as defined in
the agreement, from the operation of the restaurant. The agreement also
typically requires that the franchisee pay Wendy’s a technical assistance fee.
In the United States, the standard technical assistance fee required under a
newly executed Unit Franchise Agreement is currently $25,000 for each
restaurant.
The technical assistance fee is used to
defray some of the costs to Wendy’s in providing technical assistance in the
development of the Wendy’s restaurant, initial training of franchisees or their
operator and in providing other assistance associated with the opening of the
Wendy’s restaurant. In certain limited instances (like the regranting of
franchise rights or the relocation of an existing restaurant), Wendy’s may
charge a reduced technical assistance fee or may waive the technical assistance
fee. Wendy’s does not select or employ personnel on behalf of
franchisees.
Wendy’s
currently does not offer any financing arrangements to franchisees seeking to
build new franchised units.
However, Wendy’s had previously made such financing available to
qualified franchisees and Wendy’s had guaranteed payment on a portion of the
loans made by third-party lenders to those franchisees.
See “Management Discussion and Analysis
– Liquidity and Capital Resources – Guarantees and Other Contingencies” in
Item 7 herein, for further information regarding guaranty
obligations.
Wendy’s Restaurants of Canada,
Inc. (“WROC”), a wholly owned subsidiary of Wendy’s, holds master franchise
rights for Canada. The rights and obligations governing the majority
of franchised restaurants operating in Canada are set forth in a Single Unit
Sub-Franchise Agreement. This document provides the franchisee the right to
construct, own and operate a Wendy’s restaurant upon a site accepted by WROC and
to use the Wendy’s system in connection with the operation of the restaurant at
that site. The Single Unit Sub-Franchise Agreement provides for a 20-year term
and a 10-year renewal subject to certain conditions. The sub-franchisee pays to
WROC a monthly royalty of 4% of gross sales, as defined in the agreement, from
the operation of the restaurant or C$1,000, whichever is greater. The
agreement also typically requires that the franchisee pay WROC a technical
assistance fee. The standard technical assistance fee is currently C$35,000 for
each restaurant.
The rights and obligations governing
franchisees who wish to develop outside the United States and Canada are
currently contained in the Franchise Agreement and Services Agreement (the
“International Agreements”). The International Agreements may be for an initial
term of 10 years or 20 years depending on the country and a 10-year renewal,
subject to certain conditions. The term will expire with expiration
of the term of the lease for the restaurant site, if shorter. The
International Agreements license the franchisee to use the Wendy’s trademarks
and know-how in the operation of a Wendy’s restaurant at a specified location.
Upon execution of the International Agreements, the franchisee is required to
pay a technical assistance fee. The current technical assistance fee is
US$30,000 for each restaurant. Currently, the franchisee is required to pay a
monthly royalty equal to 2% of the monthly gross sales of the restaurant, as
defined in the International Agreements, or US$1,000, whichever is greater, and
a monthly service fee equal to 2% of the monthly gross sales of the
restaurant. In certain foreign markets, Wendy’s and the franchisee
may sign a development agreement under which the franchisee undertakes to
develop a specified number of new Wendy’s restaurants based on a negotiated
schedule. Wendy’s may agree to modify the technical assistance and/or
the monthly fees conditioned on the franchisee meeting its annual development
obligations.
See Note 7 and Note 26 of the Financial
Statements and Supplementary Data included in Item 8 herein, and the
information under “Management’s Discussion and Analysis” in Item 7 herein,
for further information regarding reserves, commitments and contingencies
involving franchisees.
Advertising
and Promotions
Wendy’s participates in two national
advertising funds established to collect and administer funds contributed for
use in advertising through television, radio, newspapers, the Internet and a
variety of promotional campaigns. Separate national advertising funds are
administered for Wendy’s U.S and Canadian locations. Contributions to the
national advertising funds are required to be made from both company-owned and
franchised restaurants and are based on a percent of restaurant retail sales. In
addition to the contributions to the national advertising funds, Wendy’s
requires additional contributions to be made for both company-owned and
franchised restaurants based on a percent of restaurant retail sales for the
purpose of local and regional advertising programs. Required franchisee
contributions to the national advertising funds and for local and regional
advertising programs are governed by the Wendy’s Unit Franchise Agreement.
Required contributions by company-owned restaurants for advertising and
promotional programs are at the same percent of retail sales as franchised
restaurants within the Wendy’s system. Currently the contribution
rate for U.S. and Canadian restaurants is generally 3% of retail sales for
national advertising and 1% of retail sales for local and regional
advertising.
See Note 29 of the Financial Statements
and Supplementary Data included in Item 8 herein, for further information
regarding advertising.
The
Arby’s Restaurant System
Arby’s is
the largest restaurant franchising system specializing in the roast beef
sandwich segment of the quick service restaurant industry. According
to Nation’s Restaurant
News, Arby’s is the 2nd largest
sandwich chain restaurant in the United States. We acquired our
company-owned Arby’s restaurants principally through the acquisitions of Sybra,
Inc. in December 2002 and the RTM Restaurant Group in July 2005. We
increase the number of our company-owned restaurants from time to time through
acquisitions as well as the development and construction of new
restaurants. There are over 3,700 Arby’s restaurants in the United
States and Canada.
As of
December 28, 2008, there were 1,176 company-owned Arby’s restaurants and 2,580
Arby’s restaurants owned by 468 franchisees. Of the 2,580
franchisee-owned restaurants, 2,457 operated within the United States and 123
operated outside the United States, principally in Canada.
ARG also
owns the T.J. Cinnamons® concept, which consists of gourmet cinnamon rolls,
gourmet coffees and other related products. As of December 28, 2008,
there were a total of 144 T.J. Cinnamons outlets, 132 of which are multi-branded
with domestic Arby’s restaurants.
In
addition to various slow-roasted roast beef sandwiches, Arby’s offers an
extensive menu of chicken, turkey and ham sandwiches, snack items and
salads. In 2001, Arby’s introduced its Market Fresh® line of premium
sandwiches on a nationwide basis. Since its introduction, the Arby’s
Market Fresh line has grown to include fresh salads made with premium
ingredients. Arby’s also offers Market Fresh wrap sandwiches inside a
tortilla wrap. In 2007, Arby's added
Toasted Subs to its sandwich selections, which is Arby’s largest menu expansion
since the 2001 introduction of its Market Fresh line. Arby’s initial
lineup of Toasted Sub offerings included four varieties on toasted ciabatta
rolls: the French Dip & Swiss, the Philly Beef, the Classic Italian and the
Turkey Bacon Club. Additional varieties of the Toasted Subs are offered on
a limited time basis.
Overview
As the
franchisor of the Arby’s restaurant system, ARG, through its subsidiaries, owns
and licenses the right to use the Arby’s brand name and trademarks in the
operation of Arby’s restaurants. ARG provides Arby’s franchisees with
services designed to increase both the revenue and profitability of their Arby’s
restaurants. The most important of these services are providing
strategic leadership for the brand, product development, quality control,
operational training and counseling regarding site selection.
The
revenues from our restaurant business are derived from three principal sources:
(1) sales at company-owned restaurants; (2) franchise royalties received from
all Arby’s franchised restaurants; and (3) up-front franchise fees from
restaurant operators for each new unit opened.
Arby’s
Restaurants
Arby’s
opened its first restaurant in Boardman, Ohio in 1964. As of December
28, 2008, ARG and Arby’s franchisees operated Arby’s restaurants in 48 states,
and four foreign countries. See “Item 2. Properties” for a listing of
the number of Company-owned and franchised locations in the United States and in
foreign countries.
Arby’s
restaurants in the United States and Canada typically range in size from 2,500
square feet to 3,000 square feet, and almost all of the freestanding system-wide
restaurants feature drive-thru windows. Restaurants typically have a
manager, at least one assistant manager and as many as 30 full and part-time
employees. Staffing levels, which vary during the day, tend to be heaviest
during the lunch hours.
During
2008, ARG opened 40 new Arby’s restaurants and closed 15 generally
underperforming Arby’s restaurants. In addition, ARG acquired 42
existing Arby’s restaurants from its franchisees, including one that was
previously operated by ARG under a management agreement. During 2008, Arby’s
franchisees opened 87 new Arby’s restaurants and closed 44 generally
underperforming Arby’s restaurants. In addition, during 2008, Arby’s
franchisees closed 52 T.J. Cinnamons outlets located in Arby’s units, and
franchisees closed an additional six T.J. Cinnamons outlets located outside of
Arby’s units. As of December 28, 2008, franchisees have committed to
open 415 Arby’s restaurants over the next ten years. You should read
the information contained in “Item 1A. Risk Factors—Our restaurant business is
significantly dependent on new restaurant openings, which may be affected by
factors beyond our control.”
As of
December 28, 2008, Canadian franchisees have committed to open 11 Arby’s
restaurants over the next ten years. During 2008, five new Arby’s
units were opened in Canada and six Arby’s units in Canada were
closed. During 2008, no other Arby’s units were opened or closed
outside the United States.
The
following table sets forth the number of Arby’s restaurants at the beginning and
end of each year from 2006 to 2008:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Restaurants
open at beginning of period
|
|
|
3,688 |
|
|
|
3,585 |
|
|
|
3,506 |
|
Restaurants
opened during period
|
|
|
127 |
|
|
|
148 |
|
|
|
131 |
|
Restaurants
closed during period
|
|
|
(59 |
) |
|
|
(45 |
) |
|
|
(52 |
) |
Restaurants
open at end of period
|
|
|
3,756 |
|
|
|
3,688 |
|
|
|
3,585 |
|
During the period from January 2, 2006,
through December 28, 2008, 406 Arby’s restaurants were opened and 156 generally
underperforming Arby’s restaurants were closed. We believe that
closing underperforming Arby’s restaurants has a positive effect on the average
annual unit sales volume of the Arby’s system, as well as improves the overall
brand image of Arby’s.
As of December 28, 2008, ARG owned or
operated 1,176 domestic Arby’s restaurants, of which 1,147 were freestanding
units, twelve were in shopping malls, five were in office buildings/urban
in-line locations, four were in convenience stores, five were in travel plazas
and three were in strip center locations.
Provisions
and Supplies
As of
December 28, 2008, three independent meat processors (five total production
facilities) supplied all of Arby’s beef for roasting in the United
States. Franchise operators are required to obtain beef for roasting
from these approved suppliers.
ARCOP, Inc., a not-for-profit
purchasing cooperative, negotiates contracts with approved suppliers on behalf
of ARG and Arby’s franchisees. Suppliers to the Arby’s system must
comply with United States Department of Agriculture (“USDA”) and United States
Food and Drug Administration (“FDA”) regulations governing the manufacture,
packaging, storage, distribution and sale of all food and packaging
products. Franchisees may obtain other products, including food,
ingredients, paper goods, equipment and signs, from any source that meets ARG’s
specifications and approval. Through ARCOP, ARG and Arby’s
franchisees purchase food, beverage, proprietary paper and operating supplies
under national contracts with pricing based upon total system
volume.
Trademarks
and Service Marks
ARG,
through its subsidiaries, owns several trademarks that we consider to be
material to our restaurant business, including Arby’s®, Arby’s Market Fresh®,
Market Fresh®, Horsey Sauce®, Sidekickers® and Roastburger ™.
ARG’s
material trademarks are registered in the U.S. Patent and Trademark Office and
various foreign jurisdictions. Our registrations for such trademarks
in the United States will last indefinitely as long as ARG continues to use and
police the trademarks and renew filings with the applicable governmental
offices. There are no pending challenges to ARG’s right to use any of its
material trademarks in the United States.
Seasonality
Arby’s
restaurant operations are not significantly impacted by
seasonality. However, our restaurant revenues are somewhat lower in
our first quarter.
Competition
Arby’s
faces direct and indirect competition from numerous well-established
competitors, including national and regional non-burger sandwich chains, such as
Panera Bread®, Subway® and Quiznos®, as well as hamburger chains, such as
McDonald’s®, Burger King® and Wendy’s®, and other quick service restaurant
chains, such as Taco Bell®, Chick-Fil-A® and Kentucky Fried
Chicken®. In addition, Arby’s competes with locally owned
restaurants, drive-ins, diners and other similar establishments. Key competitive
factors in the quick service restaurant industry are price, quality of products,
convenience, quality and speed of service, advertising, brand awareness,
restaurant location and attractiveness of facilities. Arby’s also
competes within the food service industry and the quick service restaurant
sector not only for customers, but also for personnel, suitable real estate
sites and qualified franchisees.
Many of
the leading restaurant chains have focused on new unit development as one
strategy to increase market share through increased consumer awareness and
convenience. This has led to increased competition for available development
sites and higher development costs for those sites. Competitors also
employ marketing strategies such as frequent use of price discounting, frequent
promotions and heavy advertising expenditures. Continued price
discounting in the quick service restaurant industry and the emphasis on value
menus has had and could continue to have an adverse impact on us. In
addition, the growth of fast casual chains and other in-line competitors could
cause some fast food customers to “trade up” to a more traditional dining out
experience while keeping the benefits of quick service dining.
Other restaurant chains have also
competed by offering higher quality sandwiches made with fresh ingredients and
artisan breads. Several chains have also sought to compete by
targeting certain consumer groups, such as capitalizing on trends toward certain
types of diets (e.g., low carbohydrate or low trans fat) by offering menu items
that are promoted as being consistent with such diets.
Additional
competitive pressures for prepared food purchases come from operators outside
the restaurant industry. A number of major grocery chains offer fresh
deli sandwiches and fully prepared food and meals to go as part of their deli
sections. Some of these chains also have in-store cafes with service
counters and tables where consumers can order and consume a full menu of items
prepared especially for that portion of the operation. Additionally,
convenience stores and retail outlets at gas stations frequently offer
sandwiches and other foods.
Many of
our competitors have substantially greater financial, marketing, personnel and
other resources than we do.
Quality
Assurance
ARG has
developed a quality assurance program designed to maintain standards and the
uniformity of menu offerings at all Arby’s restaurants. ARG assigns a
quality assurance employee to each of the independent facilities that process
beef for domestic Arby’s restaurants. The quality assurance employee inspects
the beef for quality, uniformity and to assure compliance with quality and
safety requirements of the USDA and the FDA. In addition, ARG
periodically evaluates randomly selected samples of beef and other products from
its supply chain. Each year, ARG representatives conduct unannounced
inspections of operations of a number of franchisees to ensure that required
policies, practices and procedures are being followed. ARG field representatives
also provide a variety of on-site consulting services to
franchisees. ARG has the right to terminate franchise agreements if
franchisees fail to comply with quality standards.
Acquisitions
and Dispositions of Arby’s Restaurants
As part
of ARG’s continuous efforts to enhance the Arby’s brand, grow the Arby’s system
and improve Arby’s system operations, ARG from time to time acquires or sells
individual or multiple Arby’s restaurants. ARG may use such
transactions as a way of further developing a targeted market. For
example, ARG may sell a number of restaurants in a particular market to a
franchisee and obtain a commitment from the franchisee to develop additional
restaurants in that market. Or, ARG may acquire restaurants from a
franchisee demonstrating a limited desire to grow and then seek to further
penetrate that market through the development of additional company-owned
restaurants. ARG believes that dispositions of multiple restaurants
at once can also be an effective strategy for attracting new franchisees who
seek to be multiple unit operators with the opportunity to benefit from
economies of scale. In addition, ARG may acquire restaurants from a
franchisee who wishes to exit the Arby’s system. When ARG acquires
underperforming restaurants, it seeks to improve their results of operations and
then either continues to operate them as company-owned restaurants or re-sells
them to new or existing franchisees.
Franchised
Restaurants
ARG seeks
to identify potential franchisees that have experience in owning and operating
quick service restaurant units, have a willingness to develop and operate Arby’s
restaurants and have sufficient net worth. ARG identifies applicants
through its website, targeted mailings, maintaining a presence at industry trade
shows and conventions, existing customer and supplier contacts and regularly
placed advertisements in trade and other publications. Prospective
franchisees are contacted by an ARG sales agent and complete an application for
a franchise. As part of the application process, ARG requires and
reviews substantial documentation, including financial statements and documents
relating to the corporate or other business organization of the
applicant. Franchisees that already operate one or more Arby’s
restaurants must satisfy certain criteria in order to be eligible to enter into
additional franchise agreements, including capital resources commensurate with
the proposed development plan submitted by the franchisee, a commitment by the
franchisee to employ trained restaurant management and to maintain proper
staffing levels, compliance by the franchisee with all of its existing franchise
agreements, a record of operation in compliance with Arby’s operating standards,
a satisfactory credit rating and the absence of any existing or threatened legal
disputes with Arby’s. The initial term of the typical “traditional”
franchise agreement is 20 years.
ARG
currently does not offer any financing arrangements to franchisees seeking to
build new franchised units.
ARG
offers franchises for the development of both single and multiple “traditional”
and “non-traditional” restaurant locations. As compared to traditional
restaurants, non-traditional restaurants generally occupy a smaller retail
space, offer no or very limited seating, may cater to a captive audience, have a
limited menu, and possibly have reduced services, labor and storage and
different hours of operation. Both new and existing franchisees may enter
into a development agreement, which requires the franchisee to develop one or
more Arby’s restaurants in a particular geographic area or at a specific site
within a specific time period. All franchisees are required to execute
standard franchise agreements. ARG’s standard U.S. franchise agreement for
new Arby’s traditional restaurant franchises currently requires an initial
$37,500 franchise fee for the first franchised unit, $25,000 for each subsequent
unit and a monthly royalty payment equal to 4.0% of restaurant sales for the
term of the franchise agreement. ARG’s non-traditional restaurant
franchise agreement requires an initial $12,500 franchise fee for the first and
all subsequent units, and a monthly royalty payment ranging from 4.0% to 6.8%,
depending upon the non-traditional restaurant category. Franchisees of
traditional restaurants typically pay a $10,000 commitment fee, and franchisees
of non-traditional restaurants typically pay a $12,500 commitment fee, which is
credited against the franchise fee during the development process for a new
restaurant.
In 2007
and 2008, ARG introduced several programs designed to accelerate the development
of restaurants. In 2007, in order to increase development of traditional
Arby’s restaurants in selected markets, our Select Market Initiative (“SMI”)
program was introduced. ARG’s franchise agreement for participants in the
SMI program currently requires an initial $27,500 franchise fee for the first
franchised unit, $15,000 for each subsequent unit and a monthly royalty payment
equal to 1.0% of restaurant sales for the first 36 months the unit is
open. After 36 months, the monthly royalty rate reverts to the prevailing
4% rate for the remaining term of the agreement. The commitment fee is
$5,000 per restaurant, which is credited against the franchise fee during the
development process.
In 2008,
in order to promote conversion of other quick service restaurants into Arby’s
restaurants, our U.S. Conversion Incentive (“CI”) program was introduced.
The CI applies to freestanding properties, and calls for an initial $13,500
franchise fee for the first franchised unit, $1,000 for each subsequent unit,
and a graduated scale monthly royalty payment equal to 1% for the first twelve
months the unit is open, 2% for the for the second twelve months the unit is
open, 3% for the third twelve months the unit is open, and the prevailing 4% for
the remaining term of the agreement. The commitment fee is $1,000 per
restaurant, which is credited against the franchise fee during the development
process. Another eligibility requirement is that CI units must be open and
operating by November 30, 2010.
Because
of lower royalty rates still in effect under certain agreements, the average
royalty rate paid by U.S. ARG franchisees was approximately 3.6% in each of
2006, 2007 and 2008.
Franchised
restaurants are required to be operated under uniform operating standards and
specifications relating to the selection, quality and preparation of menu items,
signage, decor, equipment, uniforms, suppliers, maintenance and cleanliness of
premises and customer service. ARG monitors franchisee operations and
inspects restaurants periodically to ensure that required practices and
procedures are being followed.
Advertising
and Marketing
Arby’s
advertises nationally on cable television networks. In addition, from time
to time, Arby’s will sponsor a nationally televised event or participate in a
promotional tie-in for a movie. Locally, Arby’s primarily advertises
through regional network and cable television, radio and newspapers. The
AFA Service Corporation (the “AFA”), an independent membership corporation in
which every domestic Arby’s franchisee is required to participate, was formed to
create advertising and perform marketing for the Arby’s system. ARG’s
chief marketing officer currently serves as president of the AFA. The
AFA is managed by ARG pursuant to a management agreement, as described
below. The AFA is funded primarily through member dues. As of
January 1, 2009, ARG and most domestic Arby’s franchisees must pay 1.2% of gross
sales as dues to AFA. Domestic franchisee participants in our SMI program
pay an extra 1% (currently 2.2% total) of gross sales as AFA dues for the first
36 months of operation, then their dues revert to the lower prevailing
rate.
Effective
October 2005, ARG and the AFA entered into a management agreement (the
“Management Agreement”) that ARG believes has enabled a closer working
relationship between ARG and the AFA, allowed for improved collaboration on
strategic marketing decisions and created certain operational efficiencies, thus
benefiting the Arby’s system as a whole. Pursuant to the Management
Agreement, ARG assumed general responsibility for the day-to-day operations of
the AFA, including preparing annual operating budgets, developing the brand
marketing strategy and plan, recommending advertising and media buying agencies,
and implementing all marketing/media plans. ARG performs these tasks
subject to the approval of the AFA’s Board of Directors. In addition
to these responsibilities, ARG is obligated to pay for the general and
administrative costs of the AFA, other than the cost of an annual audit of the
AFA and certain other expenses specifically retained by the AFA. ARG
provided AFA with general and administrative services in 2008, a portion of
which was offset by the AFA’s payment of $0.5 million to ARG, as required under
the Management Agreement. Beginning in 2009 and for each year
thereafter, the AFA will no longer be required to make any such offsetting
payments to ARG. Under the Management Agreement, ARG is also required
to provide the AFA with appropriate office space at no cost to the
AFA. The Management Agreement with the AFA continues in effect until
terminated by either party upon one year’s prior written notice. In
addition, the AFA may terminate the Management Agreement upon six months’ prior
written notice if there is a change in the identity of any two of the
individuals holding the titles of Chief Executive Officer, Chief Operating
Officer or Chief Administrative Officer of ARG in any period of 36
months. See Note 29 of the
Financial Statements and Supplementary Data included in Item 8 herein, for
further information on the Management Agreement with AFA.
In
addition to their contributions to the AFA, ARG and Arby’s domestic franchisees
are also required to spend a reasonable amount, but not less than 3% of gross
sales of their Arby’s restaurants, for local advertising. This amount
is divided between (i) individual local market advertising expenses and (ii)
expenses of a cooperative area advertising program. Contributions to
the cooperative area advertising program, in which both company-owned and
franchisee-owned restaurants participate, are determined by the local
cooperative participants and are generally in the range of 3% to 7% of gross
sales. Domestic franchisee participants in our SMI program are not,
however, required to make any expenditure for local advertising until
their restaurants have been in operation for 36 months.
General
Governmental
Regulations
Various
state laws and the Federal Trade Commission regulate Wendy’s and Arby’s
franchising activities. The Federal Trade Commission requires that
franchisors make extensive disclosure to prospective franchisees before the
execution of a franchise agreement. Several states require registration and
disclosure in connection with franchise offers and sales and have “franchise
relationship laws” that limit the ability of franchisors to terminate franchise
agreements or to withhold consent to the renewal or transfer of these
agreements. In addition, Wendy’s and Arby’s and their respective
franchisees must comply with the federal Fair Labor Standards Act and the
Americans with Disabilities Act (the “ADA”), which requires that all public
accommodations and commercial facilities meet federal requirements related to
access and use by disabled persons, and various state and local
laws
governing
matters that include, for example, the handling, preparation and sale of food
and beverages, the provision of nutritional information on menu boards, minimum
wages, overtime and other working and safety conditions. Compliance
with the ADA requirements could require removal of access barriers and
non-compliance could result in imposition of fines by the U.S. government or an
award of damages to private litigants. As described more fully under “Item 3.
Legal Proceedings,” one of ARG’s subsidiaries was a defendant in a lawsuit
alleging failure to comply with Title III of the ADA at approximately 775
company-owned restaurants acquired as part of the July 2005 acquisition of the
RTM Restaurant Group. Under a court approved settlement of that
lawsuit, we estimate that ARG will spend approximately $1.15 million per year of
capital expenditures over a seven-year period which commenced in 2008 to bring
these restaurants into compliance with the ADA, in addition to paying certain
legal fees and expenses. We do not believe that the costs related to
this matter or any other costs relating to compliance with the ADA will have a
material adverse effect on the Company’s consolidated financial position or
results of operations. We cannot predict the effect on our
operations, particularly on our relationship with franchisees, of any pending or
future legislation.
Environmental
Matters
Our past
and present operations are governed by federal, state and local environmental
laws and regulations concerning the discharge, storage, handling and disposal of
hazardous or toxic substances. These laws and regulations provide for
significant fines, penalties and liabilities, sometimes without regard to
whether the owner or operator of the property knew of, or was responsible for,
the release or presence of the hazardous or toxic substances. In addition, third
parties may make claims against owners or operators of properties for personal
injuries and property damage associated with releases of hazardous or toxic
substances. We cannot predict what environmental legislation or regulations will
be enacted in the future or how existing or future laws or regulations will be
administered or interpreted. We similarly cannot predict the amount of future
expenditures that may be required to comply with any environmental laws or
regulations or to satisfy any claims relating to environmental laws or
regulations. We believe that our operations comply substantially with all
applicable environmental laws and regulations. Accordingly, the environmental
matters in which we are involved generally relate either to properties that our
subsidiaries own, but on which they no longer have any operations, or properties
that we or our subsidiaries have sold to third parties, but for which we or our
subsidiaries remain liable or contingently liable for any related environmental
costs. Our company-owned Wendy’s and Arby’s restaurants have not been
the subject of any material environmental matters. Based on currently
available information, including defenses available to us and/or our
subsidiaries, and our current reserve levels, we do not believe that the
ultimate outcome of the environmental matter discussed below or other
environmental matters in which we are involved will have a material adverse
effect on our consolidated financial position or results of operations. See
“Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations” below.
In 2001, a vacant property owned by
Adams Packing Association, Inc. (“Adams”), an inactive subsidiary of the
Company, was listed by the United States Environmental Protection Agency on the
Comprehensive Environmental Response, Compensation and Liability Information
System (“CERCLIS”) list of known or suspected contaminated sites. The
CERCLIS listing appears to have been based on an allegation that a former tenant
of Adams conducted drum recycling operations at the site from some time prior to
1971 until the late 1970s. The business operations of Adams were sold
in December 1992. In February 2003, Adams and the Florida Department
of Environmental Protection (the “FDEP”) agreed to a consent order that provided
for development of a work plan for further investigation of the site and limited
remediation of the identified contamination. In May 2003, the FDEP
approved the work plan submitted by Adams’ environmental consultant and during
2004 the work under that plan was completed. Adams submitted its
contamination assessment report to the FDEP in March 2004. In August
2004, the FDEP agreed to a monitoring plan consisting of two sampling events
which occurred in January and June 2005 and the results were submitted to the
FDEP for its review. In November 2005, Adams received a letter from
the FDEP identifying certain open issues with respect to the
property. The letter did not specify whether any further actions are
required to be taken by Adams. Adams sought clarification from the
FDEP in order to attempt to resolve this matter. On May 1, 2007, the
FDEP sent a letter clarifying their prior correspondence and reiterated the open
issues identified in their November 2005 letter. In addition, the
FDEP offered Adams the option of voluntarily taking part in a recently adopted
state program that could lessen site clean up standards, should such a clean up
be required after a mandatory further study and site assessment
report. With our consultants and outside counsel, we reviewed this
option and sent our response and proposed work plan to FDEP on April 24, 2008
and have commenced additional testing as suggested by the FDEP and pursuant to
the work plan submitted. Once testing is completed Adams will provide
an amended response to the FDEP. Nonetheless, based on amounts spent
prior to 2007 of approximately $1.7 million for all of these costs and after
taking into consideration various legal defenses available to the Company,
including Adams, the Company expects that the final resolution of this matter
will not have a material effect on the Company’s financial position or results
of operations. See “Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations--Legal and Environmental Matters.”
In
addition to the environmental matter described above, we are involved in other
litigation and claims incidental to our current and prior
businesses. We and our subsidiaries have reserved for all of our
legal and environmental matters aggregating $6.9 million as of December 28,
2008. 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/or our subsidiaries, and given the aforementioned reserves and our insurance
coverages, 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.
Employees
As of
December 28, 2008, Wendy’s/Arby’s and its subsidiaries had approximately 70,000
employees, including 11,677 salaried employees
and 58,613 hourly employees. We believe that our employee
relations are satisfactory.
Item
1A. Risk
Factors.
We wish
to caution readers that in addition to the important factors described elsewhere
in this Form 10-K, the following important factors, among others, sometimes have
affected, or in the future could affect, our actual results and could cause our
actual consolidated results during 2009, and beyond, to differ materially from
those expressed in any forward-looking statements made by us or on our
behalf.
Risks
Related to Wendy’s/Arby’s Group, Inc.
We may not be able to successfully consolidate business operations and realize
the anticipated benefits of the merger with Wendy’s International,
Inc.
Realization
of the anticipated benefits of the Wendy’s Merger, which was completed on
September 29, 2008, including anticipated synergies and overhead savings, will
depend, in large part, on our ability to successfully eliminate redundant
corporate functions and consolidate public company and shared service
responsibilities. We will be required to devote significant management attention
and resources to the consolidation of business practices and support functions
while maintaining the independence of the Arby’s and Wendy’s standalone brands.
The challenges we may encounter include the following:
|
·
|
preserving
franchisee, supplier and other important relationships and resolving
potential conflicts between the standalone brands that may arise as a
result of the Wendy’s Merger;
|
|
·
|
consolidating
redundant operations, including corporate
functions;
|
|
·
|
realizing
targeted margin improvements at Company-owned Wendy’s restaurants;
and
|
|
·
|
addressing
differences in business cultures between Arby’s and Wendy’s, preserving
employee morale and retaining key employees, maintaining focus on
providing consistent, high quality customer service, meeting the
operational and financial goals of the Company and maintaining the
operational goals of each of the standalone
brands.
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The
process of consolidating corporate level operations could cause an interruption
of, or loss of momentum in, our business and financial performance. The
diversion of management’s attention and any delays or difficulties encountered
in connection with the Wendy’s Merger and the realization of corporate synergies
and operational improvements could have an adverse effect on our business,
financial results, financial condition or stock price. The consolidation and
integration process may also result in additional and unforeseen expenses. There
can be no assurance that the contemplated expense savings, improvements in
Wendy’s store-level margins and synergies anticipated from the Wendy’s Merger
will be realized.
There
can be no assurance regarding whether or to what extent we will pay dividends on
our common stock in the future.
Holders
of our common stock will only be entitled to receive such dividends as our board
of directors may declare out of funds legally available for such payments. Any
dividends will be made at the discretion of the board of directors and will
depend on our earnings, financial condition, cash requirements and such other
factors as the board of directors may deem relevant from time to
time.
Because
we are a holding company, our ability to declare and pay dividends is dependent
upon cash, cash equivalents and short-term investments on hand and cash flows
from our subsidiaries. The ability of any of our subsidiaries to pay cash
dividends and/or make loans or advances to the holding company will be dependent
upon their respective abilities to achieve sufficient cash flows after
satisfying their respective cash requirements, including debt service and
revolving credit agreements, to enable the payment of such dividends or the
making of such loans or advances. The ability of any of our subsidiaries to pay
cash dividends or other payments to us will also be limited by restrictions in
debt instruments currently existing or subsequently entered into by such
subsidiaries.
A
substantial amount of our common stock is concentrated in the hands of certain
stockholders.
Nelson
Peltz, our Chairman and former Chief Executive Officer, and Peter May, our Vice
Chairman and former President and Chief Operating Officer beneficially own
shares of our outstanding common stock that collectively constitute
approximately 22% of our total voting power.
Messrs.
Peltz and May may, from time to time, acquire beneficial ownership of additional
shares of common stock. On November 5, 2008, in connection with the
tender offer of Trian Fund Management, L.P. and certain affiliates thereof for
up to 40 million shares of our common stock, we entered into an agreement (the
“Trian Agreement”) with Messrs. Peltz and May and several of their affiliates
(the “Covered Persons”) thereof which provides, among other things, that: (i) to
the extent the Covered Persons acquire any rights in respect of our common stock
so that the effect of such acquisition would increase their aggregate beneficial
ownership in our common stock to greater than 25%, the Covered Persons may not
engage in a business combination (within the meaning of Section 203 of the
Delaware General Corporation Law ) for a period of three years following the
date of such occurrence unless such transaction would be subject to the
exceptions set forth in Section 203(b)(3) through (7) (assuming for these
purposes that 15% in the definition of interested stockholder contained in
Section 203 was deemed to be 25%); (ii) for so long as we have a class of equity
securities that is listed for trading on the
New York
Stock Exchange or any other national securities exchange, none of the Covered
Persons shall solicit proxies or submit any proposal for the vote of our
stockholders or recommend or request or induce any other person to take any such
actions or seek to advise, encourage or influence any other person with respect
to our common stock, in each case, if the result of such action would be to
cause the Board of Directors to be comprised of less than a majority of
independent directors; and (iii) for so long as we have a class of equity
securities that is listed for trading on the New York Stock Exchange or any
other national securities exchange, none of the Covered Persons shall engage in
certain affiliate transactions with us without the prior approval of a majority
of the Audit Committee or other committee of the Board of Directors that is
comprised of independent directors. The Trian Agreement will terminate upon the
earliest to occur of (i) the Covered Persons beneficially owning less than 15%
of our common stock, (ii) November 5, 2011 and (iii) at such time as any person
not affiliated with the Covered Persons makes an offer to purchase an amount of
our common stock which when added to our common stock already beneficially owned
by such person and its affiliates and associates equals or exceeds 50% or more
of our common stock or all or substantially all of our assets or solicits
proxies with respect to a majority slate of directors.
This
concentration of ownership gives Messrs. Peltz and May significant influence
over the outcome of actions requiring majority stockholder
approval. If in the future Messrs. Peltz and May were to acquire more
than a majority of our outstanding voting power, they would be able to determine
the outcome of the election of members of the board of directors and the outcome
of corporate actions requiring majority stockholder approval, including mergers,
consolidations and the sale of all or substantially all of our
assets. They would also be in a position to prevent or cause a change
in control of us.
Our success
depends substantially upon the continued retention of certain key
personnel.
We
believe that over time our success has been dependent to a significant extent
upon the efforts and abilities of our senior management team. The
failure by us to retain members of our senior management team could adversely
affect our ability to build on the efforts we have undertaken to increase the
efficiency and profitability of our businesses.
Acquisitions
have been a key element of our business strategy, but we cannot assure you that
we will be able to identify appropriate acquisition targets in the future and
that we will be able to successfully integrate any future acquisitions into our
existing operations.
Acquisitions
involve numerous risks, including difficulties assimilating new operations and
products. In addition, acquisitions may require significant
management time and capital resources. We cannot assure you that we
will have access to the capital required to finance potential acquisitions on
satisfactory terms, that any acquisition would result in long-term benefits to
stockholders or that management would be able to manage effectively the
resulting business. Future acquisitions, if any, may result in the
incurrence of additional indebtedness, which could contain restrictive
covenants, or the issuance of additional equity securities, which could dilute
our existing stockholders.
Our
investment of excess funds in accounts managed by third parties is subject to
risks associated with the underlying investment strategy of the
accounts.
From time
to time we place our excess cash in investment funds or accounts managed by
third parties (including the Management Company). These funds or
accounts are subject to inherent risks associated with the underlying investment
strategy, which may include significant exposure to the equity and credit
markets, the use of leverage and a lack of diversification.
Our
certificate of incorporation contains certain anti-takeover provisions and
permits our board of directors to issue preferred stock without stockholder
approval.
Certain provisions in our certificate
of incorporation are intended to discourage or delay a hostile takeover of
control of us. Our certificate of incorporation authorizes the
issuance of shares of “blank check” preferred stock, which will have such
designations, rights and preferences as may be determined from time to time by
our board of directors. Accordingly, our board of directors is
empowered, without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect the
voting power and other rights of the holders of our common stock. The
preferred stock could be used to discourage, delay or prevent a change in
control of us that is determined by our board of directors to be
undesirable. Although we have no present intention to issue any
shares of preferred stock, we cannot assure you that we will not do so in the
future.
Our certificate of incorporation
prohibits the issuance of preferred stock to our affiliates, unless offered
ratably to the holders of our common stock, subject to an exception in the event
that we are in financial distress and the issuance is approved by our audit
committee. This prohibition limits our ability to raise capital from
affiliates.
Risks
Related to the Wendy’s and Arby’s Businesses
Growth
of our restaurant businesses is significantly dependent on new restaurant
openings, which may be affected by factors beyond our control.
Our
restaurant businesses derive earnings from sales at company-owned restaurants,
franchise royalties received from franchised restaurants and franchise fees from
franchise restaurant operators for each new unit opened. Growth in
our restaurant revenues and
earnings
is significantly dependent on new restaurant openings. Numerous
factors beyond our control may affect restaurant openings. These
factors include but are not limited to:
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our
ability to attract new franchisees;
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the
availability of site locations for new
restaurants;
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the
ability of potential restaurant owners to obtain financing, which has
become more difficult due to current market conditions and operating
results;
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the
ability of restaurant owners to hire, train and retain qualified operating
personnel;
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construction
and development costs of new restaurants, particularly in
highly-competitive markets;
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the
ability of restaurant owners to secure required governmental approvals and
permits in a timely manner, or at all;
and
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adverse
weather conditions.
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Although
as of December 28, 2008, franchisees had signed commitments to open 493 Wendy’s
or Arby’s restaurants over the next seven years and have made or are required to
make non-refundable deposits, we cannot assure you that franchisees will meet
these commitments and that they will result in new restaurants. See “Item
1. Business—The Wendy’s Restaurant System—Franchised Restaurants” and “—The
Arby’s Restaurant System—Franchised Restaurants.”
Wendy’s
and Arby’s franchisees could take actions that could harm our
business.
Wendy’s
and Arby’s franchisees are contractually obligated to operate their restaurants
in accordance with the standards set forth in agreements with
them. Each brand also provides training and support to
franchisees. However, franchisees are independent third parties that
we do not control, and the franchisees own, operate and oversee the daily
operations of their restaurants. As a result, the ultimate success
and quality of any franchise restaurant rests with the franchisee. If
franchisees do not successfully operate restaurants in a manner consistent with
required standards, royalty payments to us will be adversely affected and the
brand’s image and reputation could be harmed, which in turn could hurt our
business and operating results.
Our
success depends on franchisees’ participation in brand strategies.
Wendy’s
and Arby’s franchisees are an integral part of our business. Each
brand may be unable to successfully implement brand strategies that
it believes are necessary for further growth if franchisees do not participate
in that implementation. The failure of franchisees to focus on the
fundamentals of restaurant operations such as quality, service, food safety and
cleanliness would have a negative impact on our business.
Our
financial results are affected by the operating results of
franchisees.
As of
December 28, 2008, approximately 79% of the Wendy’s system and 69% of the Arby’s
system were franchise restaurants. We receive revenue in the form of
royalties, which are generally based on a percentage of sales at franchised
restaurants, rent and fees from franchisees. Accordingly, a
substantial portion of our financial results is to a large extent dependent upon
the operational and financial success of our franchisees. If sales
trends or economic conditions worsen for franchisees, their financial results
may worsen and our royalty, rent and other fee revenues may
decline. In addition, accounts receivable and related reserves may
increase. When company-owned restaurants are sold, one of our
subsidiaries is often required to remain responsible for lease payments for
these restaurants to the extent that the purchasing franchisees default on their
leases. Additionally, if franchisees fail to renew their franchise
agreements, or if we decide to restructure franchise agreements in order to
induce franchisees to renew these agreements, then our royalty revenues may
decrease.
Each brand may be unable to manage effectively
its strategy of
acquiring and disposing of restaurants, which could adversely
affect our business and financial
results.
Each
brand’s strategy of acquiring restaurants from franchisees and eventually
“re-franchising” these restaurants by selling them to new or existing
franchisees is dependent upon the availability of sellers and buyers, the
availability of financing, and the brand’s ability to negotiate transactions on
terms deemed acceptable. In addition, the operations of restaurants
that each brand acquires may not be integrated successfully, and the intended
benefits of such transactions may not be realized. Acquisitions of
franchised restaurants pose various risks to brand operations,
including:
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diversion
of management attention to the integration of acquired restaurant
operations;
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increased
operating expenses and the inability to achieve expected cost savings and
operating efficiencies;
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exposure
to liabilities arising out of sellers’ prior operations of acquired
restaurants; and
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incurrence
or assumption of debt to finance acquisitions or improvements and/or the
assumption of long-term, non-cancelable
leases.
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In
addition, engaging in acquisitions and dispositions places increased
demands on the brand’s operational and financial management resources and
may require us to continue to expand these resources. If either
brand is unable to manage the acquisition and disposition strategy
effectively, its business and financial results could be adversely
affected.
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ARG
does not exercise ultimate control over advertising for its restaurant system,
which could harm sales and the brand.
Arby’s
franchisees control the provision of national advertising and marketing services
to the Arby’s franchise system through the AFA, a company controlled
by Arby’s franchisees. Subject to ARG’s right to protect its
trademarks, and except to the extent that ARG participates in the
AFA through its company-owned restaurants, the AFA has the right to
approve all significant decisions regarding the national marketing and
advertising strategies and the creative content of advertising for the Arby’s
system. Although ARG has entered into a management agreement pursuant
to which ARG, on behalf of the AFA, manages the day-to-day operations of the
AFA, many areas are still subject to ultimate approval by the AFA’s independent
board of directors, and the management agreement may be terminated by either
party for any reason upon one year’s prior notice. See “Item 1.
Business—The Arby’s Restaurant System—Advertising and Marketing.” In
addition, local cooperatives run by operators of Arby’s restaurants in a
particular local area (including ARG) make their own decisions regarding local
advertising expenditures, subject to spending the required minimum
amounts. ARG’s lack of control over advertising could hurt sales and
the Arby’s brand.
ARG
does not exercise ultimate control over purchasing for Arby’s restaurant system,
which could harm sales and the Arby’s brand.
Although
ARG ensures that all suppliers to the Arby’s system meet quality control
standards, Arby’s franchisees control the purchasing of food, proprietary paper,
equipment and other operating supplies from such suppliers through ARCOP, Inc.,
a not-for-profit entity controlled by Arby’s franchisees. ARCOP
negotiates national contracts for such food, equipment and
supplies. ARG is entitled to appoint one representative on the board
of directors of ARCOP and participate in ARCOP through its company-owned
restaurants, but otherwise does not control the decisions and activities of
ARCOP except to ensure that all suppliers satisfy Arby’s quality control
standards. If ARCOP does not properly estimate the product needs of
the Arby’s system, makes poor purchasing decisions, or decides to cease its
operations, system sales and operating costs could be adversely affected and the
financial condition of ARG or the financial condition of Arby’s franchisees
could be hurt.
Shortages
or interruptions in the supply or delivery of perishable food products could
damage the Wendy’s and/or Arby's brand reputation and adversely affect our
operating results.
Each
brand and its franchisees are dependent on frequent deliveries of perishable
food products that meet brand specifications. Shortages or interruptions in the
supply of perishable food products caused by unanticipated demand, problems in
production or distribution, disease or food-borne illnesses, inclement weather
or other conditions could adversely affect the availability, quality and cost of
ingredients, which could lower our revenues, increase operating costs, damage
brand reputation and otherwise harm our business and the businesses of our
franchisees.
Instances
of mad cow disease or other food-borne illnesses, such as bird flu or
salmonella, could adversely affect the price and availability of beef, poultry
or other meats and create negative publicity, which could result in a decline in
sales.
Instances of mad cow disease or other
food-borne illnesses, such as bird flu, salmonella, e-coli or hepatitis A, could
adversely affect the price and availability of beef, poultry or other
meats. Incidents may cause consumers to shift their preferences to
other meats. As a result, Wendy’s and/or Arby’s restaurants could experience a
significant increase in food costs if there are instances of mad cow disease or
other food-borne illnesses.
In
addition to losses associated with higher prices and a lower supply of our food
ingredients, instances of food-borne illnesses could result in negative
publicity for Wendy’s and/or Arby’s. This negative publicity, as well
as any other negative publicity concerning types of food products Wendy’s or
Arby’s serves, may reduce demand for Wendy’s and/or Arby’s food and could result
in a decrease in guest traffic to our restaurants. A decrease in
guest traffic to our restaurants as a result of these health concerns or
negative publicity could result in a decline in sales at company-owned
restaurants or in royalties from sales at franchised restaurants.
Changes
in consumer tastes and preferences and in discretionary consumer spending could
result in a decline in sales at company-owned restaurants and in the royalties
that we receive from franchisees.
The quick
service restaurant industry is often affected by changes in consumer tastes,
national, regional and local economic conditions, discretionary spending
priorities, demographic trends, traffic patterns and the type, number and
location of competing restaurants. Our success depends to a significant extent
on discretionary consumer spending, which is influenced by general economic
conditions and the availability of discretionary income. Accordingly,
we may experience declines in sales during economic downturns. Any
material decline in the amount of discretionary spending or a decline in
consumer food-away-from-home spending could hurt our revenues, results of
operations, business and financial condition.
In
addition, if company-owned and franchised restaurants are unable to adapt to
changes in consumer preferences and trends, company-owned and franchised
restaurants may lose customers and the resulting revenues from company-owned
restaurants and the royalties that we receive from franchisees may
decline.
The
recent disruptions in the national and global economies and the financial
markets may adversely impact our revenues, results of operations, business and
financial condition.
The
recent disruptions in the national and global economies and financial markets,
and the related reductions in the availability of credit, have resulted in
declines in consumer confidence and spending and have made it more difficult for
businesses to obtain financing. If such conditions persist, then they may
result in significant declines in consumer food-away-from-home spending and
customer traffic in our restaurants and those of our franchisees. Such
conditions may also adversely impact the ability of franchisees to build or
purchase restaurants, remodel existing restaurants, renew expiring franchise
agreements and make timely royalty and other payments. There can be no
assurance that government responses to the disruptions in the financial markets
will restore consumer confidence, stabilize the markets or increase liquidity
and the availability of credit. If we or our franchisees are unable to
obtain borrowed funds on acceptable terms, or if conditions in the economy and
the financial markets do not improve, our revenues, results of operations,
business and financial condition could be adversely affected as a
result.
Additionally,
we enter into total return and interest rate swaps and other derivative
contracts as described in Note 12 to the Consolidated Financial Statements
included in this Form 10-K. We are exposed to potential losses in the
event of nonperformance by counterparties on these instruments, which could
adversely affect our results of operations, financial condition and
liquidity.
Changes
in food and supply costs could harm results of operations.
Our
profitability depends in part on our ability to anticipate and react to changes
in food and supply costs. Any increase in food prices, especially
those of beef or chicken, could harm operating results. Ethanol
production has increased the cost of corn, which has raised
corn oil prices and contributed to higher beef and chicken prices stemming from
increased corn feed pricing. In addition, each brand is susceptible to increases
in food costs as a result of other factors beyond its control, such as weather
conditions, global demand, food safety concerns, product recalls and government
regulations. Additionally, prices for feed ingredients used to
produce beef and chicken could be adversely affected by changes in global
weather patterns, which are inherently unpredictable. We cannot
predict whether we will be able to anticipate and react to changing food costs
by adjusting our purchasing practices and menu prices, and a failure to do so
could adversely affect our operating results. In addition, we may not
seek to or be able to pass along price increases to our customers.
Competition
from other restaurant companies could hurt our brands.
The
market segments in which company-owned and franchised Wendy’s and Arby’s
restaurants compete are highly competitive with respect to, among other things,
price, food quality and presentation, service, location, and the nature and
condition of the restaurant facility. Wendy’s and Arby’s restaurants
compete with a variety of locally-owned restaurants, as well as competitive
regional and national chains and franchises. Several of these chains
compete by offering high quality sandwiches and/or menu items that are targeted
at certain consumer groups. Additionally, many of our competitors
have introduced lower cost, value meal menu options. Our revenues and
those of our franchisees may be hurt by this product and price
competition.
Moreover,
new companies, including operators outside the quick service restaurant
industry, may enter our market areas and target our customer
base. For example, additional competitive pressures for prepared food
purchases have come from deli sections and in-store cafes of a number of major
grocery store chains, as well as from convenience stores and casual dining
outlets. Such competitors may have, among other things, lower
operating costs, lower debt service requirements, better locations, better
facilities, better management, more effective marketing and more efficient
operations. Many of our competitors have substantially greater
financial, marketing, personnel and other resources than we do, which may allow
them to react to changes in pricing and marketing strategies in the quick
service restaurant industry better than we can. Many of our
competitors spend significantly more on advertising and marketing than we do,
which may give them a competitive advantage through higher levels of brand
awareness among consumers. All such competition may adversely affect
our revenues and profits by reducing revenues of company-owned restaurants and
royalty payments from franchised restaurants.
Current
restaurant locations may become unattractive, and attractive new locations may
not be available for a reasonable price, if at all.
The
success of any restaurant depends in substantial part on its location. There can
be no assurance that our current restaurant locations will continue to be
attractive as demographic patterns change. Neighborhood or economic conditions
where our restaurants are located could decline in the future, thus resulting in
potentially reduced sales in those locations. In addition, rising real estate
prices in some areas may restrict our ability and the ability of franchisees to
purchase or lease new desirable locations. If desirable locations cannot be
obtained at reasonable prices, each brand’s ability to effect its growth
strategies will be adversely affected.
Wendy’s and Arby’s business could be hurt by increased labor costs or labor
shortages.
Labor is
a primary component in the cost of operating our company-owned
restaurants. Each brand devotes significant resources to recruiting
and training its managers and hourly employees. Increased labor costs
due to competition, increased minimum wage or employee benefits costs or other
factors would adversely impact our cost of sales and operating
expenses. In addition, each brand’s success depends on its ability to
attract, motivate and retain qualified employees, including restaurant managers
and staff. If either brand is unable to do so, our results of
operations could be adversely affected.
Each
brand’s leasing and ownership of significant amounts of real estate exposes it
to possible liabilities and losses, including liabilities associated with
environmental matters.
As of
December 28, 2008, Wendy’s leased or owned the land and/or the building for
1,406 Wendy’s restaurants and ARG leased or owned the land and/or the building
for 1,170 Arby’s restaurants. Accordingly, each brand is subject to all of the
risks associated with leasing and owning real estate. In particular, the value
of our real property assets could decrease, and costs could increase, because of
changes in the investment climate for real estate, demographic trends, supply or
demand for the use of the restaurants, which may result from competition from
similar restaurants in the area, and liability for environmental
matters.
Each
brand is subject to federal, state and local environmental, health and safety
laws and regulations concerning the discharge, storage, handling, release and
disposal of hazardous or toxic substances. These environmental laws provide for
significant fines, penalties and liabilities, sometimes without regard to
whether the owner, operator or occupant of the property knew of, or was
responsible for, the release or presence of the hazardous or toxic substances.
Third parties may also make claims against owners, operators or occupants of
properties for personal injuries and property damage associated with releases
of, or actual or alleged exposure to, such substances. A number of our
restaurant sites were formerly gas stations or are adjacent to current or former
gas stations, or were used for other commercial activities that can create
environmental impacts. We may also acquire or lease these types of sites in the
future. We have not conducted a comprehensive environmental review of all of our
properties. We may not have identified all of the potential environmental
liabilities at our leased and owned properties, and any such liabilities
identified in the future could cause us to incur significant costs, including
costs associated with litigation, fines or clean-up
responsibilities.
Each
brand leases real property generally for initial terms of
20 years with two to four additional options to extend the term
of the leases in consecutive five-year increments. Many leases provide that
the landlord may increase the rent over the term of the lease and any renewals
thereof. Most leases require us to pay all of the costs of insurance, taxes,
maintenance and utilities. We generally cannot cancel these leases. If an
existing or future restaurant is not profitable, and we decide to close it, we
may nonetheless be committed to perform its obligations under the applicable
lease including, among other things, paying the base rent for the balance of the
lease term. In addition, as each lease expires, we may fail to
negotiate additional renewals or renewal options, either on
commercially acceptable terms or at all, which could cause us to close stores in
desirable locations.
Complaints
or litigation may hurt each brand.
Occasionally,
Wendy’s and Arby’s customers file complaints or lawsuits against us alleging
that we are responsible for an illness or injury they suffered at or after a
visit to a Wendy’s or Arby’s restaurant, or alleging that there was a problem
with food quality or operations at a Wendy’s or Arby’s restaurant. We
are also subject to a variety of other claims arising in the ordinary course of
our business, including personal injury claims, contract claims, claims from
franchisees (which tend to increase when franchisees experience declining sales
and profitability) and claims alleging violations of federal and state law
regarding workplace and employment matters, discrimination and similar
matters. We could also become subject to class action lawsuits
related to these matters in the future. Regardless of whether any
claims against us are valid or whether we are found to be liable, claims may be
expensive to defend and may divert management’s attention away from operations
and hurt our performance. A judgment significantly in excess of our
insurance coverage for any claims could materially adversely affect our
financial condition or results of operations. Further, adverse
publicity resulting from these allegations may hurt us and our
franchisees.
Additionally,
the restaurant industry has been subject to a number of claims that the menus
and actions of restaurant chains have led to the obesity of certain of their
customers. Adverse publicity resulting from these allegations may
harm the reputation of our restaurants, even if the allegations are not directed
against our restaurants or are not valid, and even if we are not found liable or
the concerns relate only to a single restaurant or a limited number of
restaurants. Moreover, complaints, litigation or adverse publicity
experienced by one or more of Wendy’s or Arby’s franchisees could also hurt our
business as a whole.
Our
current insurance may not provide adequate levels of coverage against claims
that may be filed.
We
currently maintain insurance we believe is customary for businesses of our size
and type. However, there are types of losses we may incur that cannot
be insured against or that we believe are not economically reasonable to insure,
such as losses due to natural disasters or acts of terrorism. In addition, we
currently self-insure a significant portion of expected losses under workers
compensation, general liability and property insurance
programs. Unanticipated changes in the actuarial assumptions and
management estimates underlying our reserves for these losses could result in
materially different amounts of expense under these programs, which could harm
our business and adversely affect our results of operations and financial
condition.
Changes
in governmental regulation may hurt our ability to open new restaurants or
otherwise hurt our existing and future operations and
results.
Each Wendy’s and Arby’s restaurant is
subject to licensing and regulation by health, sanitation, safety and other
agencies in the state and/or municipality in which the restaurant is
located. State and local government authorities may enact laws, rules
or regulations that impact restaurant operations and the cost of conducting
those operations. For example, recent efforts to require the listing
of specified nutritional information on menus and menu boards could adversely
affect consumer demand for our products, could make our menu boards less
appealing and could increase our costs of doing business. There can
be no assurance that we and/or our franchisees will not experience material
difficulties or failures in obtaining the necessary licenses or approvals for
new restaurants, which could delay the opening of such restaurants in the
future. In addition, more stringent and varied requirements of local
governmental bodies with respect to tax, zoning, land use and environmental
factors could delay or prevent development of new restaurants in particular
locations. We and our franchisees are also subject to the Fair Labor
Standards Act, which governs such matters as minimum wages, overtime and other
working conditions, along with the ADA, family leave mandates and a variety of
other laws enacted by the states that govern these and other employment law
matters. As described more fully under “Item 3. Legal Proceedings,”
one of our subsidiaries was a defendant in a lawsuit alleging failure to comply
with Title III of the ADA at approximately 775 company-owned restaurants
acquired as part of the RTM acquisition in July 2005. Under a court
approved settlement of that lawsuit, ARG estimates that it will spend
approximately $1.15 million per year of capital expenditures over a seven-year
period commencing in 2008 to bring these restaurants into compliance with the
ADA, in addition to paying certain legal fees and expenses. We cannot
predict the amount of any other future expenditures that may be required in
order to permit company-owned restaurants to comply with any changes in existing
regulations or to comply with any future regulations that may become applicable
to our businesses.
Our
operations are influenced by adverse weather conditions.
Weather,
which is unpredictable, can impact Wendy’s and Arby’s restaurant
sales. Harsh weather conditions that keep customers from dining out
result in lost opportunities for our restaurants. A heavy snowstorm
in the Northeast or Midwest or a hurricane in the Southeast can shut down an
entire metropolitan area, resulting in a reduction in sales in that
area. Our first quarter includes winter months and historically has a
lower level of sales at company-owned restaurants. Because a
significant portion of our restaurant operating costs is fixed or semi-fixed in
nature, the loss of sales during these periods hurts our operating margins, and
can result in restaurant operating losses. For these reasons, a
quarter-to-quarter comparison may not be a good indication of either brand’s
performance or how it may perform in the future.
Due
to the concentration of Wendy’s and Arby’s restaurants in particular geographic
regions, our business results could be impacted by the adverse economic
conditions prevailing in those regions regardless of the state of the national
economy as a whole.
As of
December 28, 2008, we and our franchisees operated Wendy’s or Arby’s restaurants
in 50 states and 21 foreign countries. As of December 28, 2008 as
detailed in “Item 2. Properties”, the six leading states by number of operating
units were: Ohio, Florida, Texas, Michigan, Georgia and
Pennsylvania. This geographic concentration can cause economic
conditions in particular areas of the country to have a disproportionate impact
on our overall results of operations. It is possible that adverse
economic conditions in states or regions that contain a high concentration of
Wendy’s and Arby’s restaurants could have a material adverse impact on our
results of operations in the future.
Wendy’s and its
subsidiaries, and ARG and its subsidiaries, are subject to various restrictions,
and substantially all of their non-real estate assets are pledged subject to
certain restrictions, under a Credit Agreement.
Under an
amended and restated Credit Agreement entered into as of March 11, 2009 by
Wendy’s and its subsidiaries and ARG and its subsidiaries (collectively, the
“Borrowers”), substantially all of the assets of the Borrowers (other than real
property) are pledged as collateral security. The amended and restated Credit
Agreement also contains financial covenants that, among other things, require
the Borrowers to maintain certain aggregate leverage and interest coverage
ratios and restrict their ability to incur debt, pay dividends or make other
distributions, make certain capital expenditures, enter into certain fundamental
transactions (including sales of assets and certain mergers and consolidations)
and create or permit liens. If the Borrowers are
unable to generate sufficient cash flow or otherwise obtain the funds necessary
to make required payments of interest or principal under, or are unable to
comply with covenants of, the Credit Agreement, then they would be in default
under the terms of the agreement, which would preclude the payment of dividends
to Wendy’s/Arby’s Group, Inc., restrict access to their revolving lines of
credit and, under certain circumstances, permit the lenders to accelerate the
maturity of the indebtedness. See Note 10 of the
Financial Statements and Supplementary Data included in Item 8 herein, for
further information regarding the Credit Agreement.
We may not be able to adequately
protect our intellectual property, which could harm the value of our brands and
hurt our business.
Our
intellectual property is material to the conduct of our business. We
rely on a combination of trademarks, copyrights, service marks, trade secrets
and similar intellectual property rights to protect our brands and other
intellectual property. The success of our business strategy depends,
in part, on our continued ability to use our existing trademarks and service
marks in order to increase brand awareness and further develop our branded
products in both existing and new markets. If our efforts to protect our
intellectual property are not adequate, or if any third party misappropriates or
infringes on our intellectual property, either in print or on the Internet,
the
value of
our brands may be harmed, which could have a material adverse effect on our
business, including the failure of our brands to achieve and maintain market
acceptance. This could harm our image, brand or competitive position
and, if we commence litigation to enforce our rights, cause us to incur
significant legal fees.
We
franchise our restaurant brands to various franchisees. While we try
to ensure that the quality of our brands is maintained by all of our
franchisees, we cannot assure you that these franchisees will not take actions
that hurt the value of our intellectual property or the reputation of the
Wendy’s and/or Arby’s restaurant system.
We have
registered certain trademarks and have other trademark registrations pending in
the United States and certain foreign jurisdictions. The trademarks
that we currently use have not been registered in all of the countries outside
of the United States in which we do business or may do business in the future
and may never be registered in all of these countries. We cannot
assure you that all of the steps we have taken to protect our intellectual
property in the United States and foreign countries will be
adequate. The laws of some foreign countries do not protect
intellectual property rights to the same extent as the laws of the United
States.
In
addition, we cannot assure you that third parties will not claim infringement by
us in the future. Any such claim, whether or not it has merit, could
be time-consuming, result in costly litigation, cause delays in introducing new
menu items or investment products or require us to enter into royalty or
licensing agreements. As a result, any such claim could harm our
business and cause a decline in our results of operations and financial
condition.
Wendy's
has re-focused its breakfast initiative on key markets and reduced the number of
restaurants offering a breakfast menu from 1,070 to approximately 600 in
2008. The breakfast daypart remains competitive and markets may prove
difficult to penetrate.
The roll out and expansion of breakfast
has been accompanied by challenging competitive conditions, varied consumer
tastes and discretionary spending patterns that differ from existing dayparts.
In addition, breakfast sales could cannibalize sales during other parts of the
day and may have negative implications on food and labor costs and restaurant
margins. Wendy's has re-focused its breakfast initiative on key markets and
reduced the number of restaurants offering a breakfast menu to approximately
600. Wendy’s
will need to reinvest royalties earned and other amounts to build breakfast
brand awareness through greater investments in advertising and promotional
activities. Capital investments will also be required at company-owned
restaurants. As a result of the foregoing, breakfast sales and resulting profits
may take longer to reach expected levels.
Our international operations are subject to various factors of uncertainty and
there is no assurance that international operations will be
profitable.
Each
brand’s business outside of the United States is subject to a number of
additional factors, including international economic and political conditions,
differing cultures and consumer preferences, currency regulations and
fluctuations, diverse government regulations and tax systems, uncertain or
differing interpretations of rights and obligations in connection with
international franchise agreements and the collection of royalties from
international franchisees, the availability and cost of land and construction
costs, and the availability of experienced management, appropriate franchisees,
and joint venture partners. Although we believe we have developed the support
structure required for international growth, there is no assurance that such
growth will occur or that international operations will be
profitable.
We
rely on computer systems and information technology to run our business. Any
material failure, interruption or security breach of our computer systems or
information technology may adversely affect the operation of our business and
results of operations.
We are
significantly dependent upon our computer systems and information technology to
properly conduct our business. A failure or interruption of computer systems or
information technology could result in the loss of data, business interruptions
or delays in business operations. Also, despite our considerable efforts and
technological resources to secure our computer systems and information
technology, security breaches, such as unauthorized access and computer viruses,
may occur resulting in system disruptions, shutdowns or unauthorized disclosure
of confidential information. Any security breach of our computer systems or
information technology may result in adverse publicity, loss of sales and
profits, penalties or loss resulting from misappropriation of
information.
We
may be required to recognize additional asset impairment and other asset-related
charges.
We have
significant amounts of long-lived assets, goodwill and intangible assets and
have incurred impairment charges in the past with respect to those assets. In
accordance with applicable accounting standards, we test for impairment
generally annually, or more frequently, if there are indicators of impairment,
such as
|
|
significant
adverse changes in the business
climate;
|
|
|
current
period operating or cash flow losses combined with a history of operating
or cash flow losses or a projection or forecast that demonstrates
continuing losses associated with long-lived
assets;
|
|
|
a
current expectation that more-likely-than-not (e.g., a likelihood that is
more than 50%) long-lived assets will be sold or otherwise disposed of
significantly before the end of their previously estimated useful life;
and
|
|
|
a
significant drop in our stock
price.
|
Based
upon future economic and capital market conditions, as well as the operating
performance of our reporting units, future impairment charges could be
incurred.
The
collectability of the notes receivable due from Deerfield Capital Corp. may
affect our financial position.
Due to
significant financial weakness in the credit markets, current publicly available
information of DFR, and our ongoing assessment of the likelihood of full
repayment of the principal amount of the DFR Notes, we recorded an allowance for
doubtful collectability of $21.2 million on the DFR Notes for the fourth quarter
of 2008. This charge is included in “Other than temporary losses on
investments.” The repayment of the $48.0 million principal amount of
DFR Notes due in 2012 received in connection with the Deerfield Sale and the
payment of related interest are dependent on the cash flow of DFR, including
Deerfield. DFR’s investment portfolio is comprised primarily of fixed
income investments, including mortgage-backed securities and corporate debt and
its activities also include the asset management business of Deerfield. Among
the factors that may affect DFR’s ability to continue to pay the notes
receivable and related interest are the current dislocation in the sub-prime
mortgage sector and the current weakness in the broader credit market. These
factors could result in increases in its borrowing costs and reductions in its
liquidity and in the value of its investments, which could reduce DFR’s cash
flows and may result in an additional provision for uncollectible notes
receivable for us.
Other
Risks
One
of our subsidiaries remains contingently liable with respect to certain
obligations relating to a business that we have sold.
In July
1999, we sold 41.7% of our then remaining 42.7% interest in National Propane
Partners, L.P. and a sub-partnership, National Propane, L.P. to Columbia Energy
Group, and retained less than a 1% special limited partner interest in AmeriGas
Eagle Propane, L.P. (formerly known as National Propane, L.P. and as Columbia
Propane, L.P.). As part of the transaction, our subsidiary, National
Propane Corporation, agreed that while it remains a special limited partner of
AmeriGas, it would indemnify the owner of AmeriGas for any payments the owner
makes under certain debt of AmeriGas (aggregating approximately $138.0 million
as of December 28, 2008), if AmeriGas is unable to repay or refinance such debt,
but only after recourse to the assets of AmeriGas. Either National
Propane Corporation or AmeriGas Propane, L.P., the owner of AmeriGas, may
require AmeriGas to repurchase the special limited partner
interest. However, we believe it is unlikely that either party would
require repurchase prior to July, 19, 2009 as either AmeriGas Propane, L.P.
would owe us tax indemnification payments or we would accelerate payment of
deferred taxes, which amount to approximately $34.7 million as of December 28,
2008, associated with our sale of the propane business if National Propane
required the repurchase. As of December 28, 2008, we have net operating tax loss
carryforwards sufficient to offset substantially all of these deferred
taxes.
Although we believe that it is unlikely
that we will be called upon to make any payments under the indemnification
described above, if we are required to make such payments it could have a
material adverse effect on our financial position and results of
operations. You should read the information in “Item. 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources” and in Note 26 to the Consolidated
Financial Statements.
Changes
in environmental regulation may adversely affect our existing and future
operations and results.
Certain
of our current and past operations are or have been subject to federal, state
and local environmental laws and regulations concerning the discharge, storage,
handling and disposal of hazardous or toxic substances that provide for
significant fines, penalties and liabilities, in certain cases without regard to
whether the owner or operator of the property knew of, or was responsible for,
the release or presence of such hazardous or toxic substances. In
addition, third parties may make claims against owners or operators of
properties for personal injuries and property damage associated with releases of
hazardous or toxic substances. Although we believe that our
operations comply in all material respects with all applicable environmental
laws and regulations, we cannot predict what environmental legislation or
regulations will be enacted in the future or how existing or future laws or
regulations will be administered or interpreted. We cannot predict
the amount of future expenditures that may be required in order to comply with
any environmental laws or regulations or to satisfy any such
claims. See “Item 1. Business--General--Environmental
Matters.”
Item
1B. Unresolved Staff
Comments.
None.
Item
2. Properties.
We
believe that our properties, taken as a whole, are generally well maintained and
are adequate for our current and foreseeable business needs.
The
following table contains information about our material facilities as of
December 28, 2008:
ACTIVE
FACILITIES
|
|
FACILITIES-LOCATION
|
|
LAND
TITLE
|
|
APPROXIMATE
SQ. FT. OF FLOOR SPACE
|
Corporate
and Arby’s Headquarters
|
|
Atlanta,
GA
|
|
Leased
|
|
184,251*
|
Former
Corporate Headquarters
|
|
New
York, NY
|
|
Leased
|
|
31,237**
|
Wendy’s
Corporate Headquarters
|
|
Dublin,
OH
|
|
Owned
|
|
249,025
|
Wendy’s
Restaurants of Canada Inc.
|
|
Oakville,
Ontario Canada
|
|
Leased
|
|
35,125
|
*
|
ARCOP,
the independent Arby’s purchasing cooperative, and the Arby’s Foundation,
a not-for-profit charitable foundation in which ARG has non-controlling
representation on the board of directors, sublease approximately 2,680 and
3,800 square feet, respectively, of this space from
ARG.
|
**
|
The
Management Company subleases approximately 26,600 square feet of this
space from us.
|
At December 28, 2008, Wendy’s and
its franchisees operated 6,630 Wendy’s restaurants. Of the 1,406
company-owned Wendy’s restaurants, Wendy’s owned the land and building for 629
restaurants, owned the building and held long-term land leases for 585
restaurants and held leases covering land and building for 192
restaurants. Wendy’s land and building leases are generally written
for terms of 10 to 25 years with one or more five-year renewal options. In
certain lease agreements Wendy’s has the option to purchase the real
estate. Certain leases require the payment of additional rent equal
to a percentage, generally less than 6%, of annual sales in excess of specified
amounts. Wendy’s also owned land and buildings for, or leased, 192
Wendy’s restaurant locations which were leased or subleased to franchisees.
Surplus land and buildings are generally held for sale.
The
Bakery operates two facilities in Zanesville, Ohio that produce hamburger buns
for Wendy’s restaurants. The hamburger buns are distributed to both
company-owned and franchised restaurants using primarily the Bakery’s fleet of
trucks. As of December 28, 2008 the Bakery employed approximately 342
people at the two facilities that had a combined size of approximately 205,000
square feet.
As of
December 28, 2008, Arby’s and its franchisees operated 3,756 Arby’s
restaurants. Of the 1,176 company-owned Arby’s restaurants, ARG owned
the land and/or the buildings with respect to 138 of these restaurants and
leased or subleased the remainder. As of December 28, 2008, ARG also
owned 15 and leased 93 properties that were either leased or sublet principally
to franchisees. Our other subsidiaries also owned or leased a few
inactive facilities and undeveloped properties, none of which are material to
our financial condition or results of operations.
The location of
company-owned and franchised restaurants as of December 28, 2008 is set forth
below.
|
Wendy’s
|
Arby’s
|
State
|
Company
|
Franchise
|
Company
|
Franchise
|
Alabama
|
—
|
96
|
71
|
32
|
Alaska
|
—
|
7
|
—
|
9
|
Arizona
|
48
|
54
|
—
|
83
|
Arkansas
|
—
|
64
|
—
|
44
|
California
|
57
|
220
|
42
|
91
|
Colorado
|
47
|
80
|
—
|
64
|
Connecticut
|
5
|
44
|
12
|
2
|
Delaware
|
—
|
15
|
—
|
19
|
Florida
|
189
|
308
|
94
|
90
|
Georgia
|
55
|
240
|
93
|
59
|
Hawaii
|
7
|
__
|
—
|
7
|
Idaho
|
—
|
29
|
—
|
22
|
Illinois
|
97
|
90
|
5
|
146
|
Indiana
|
5
|
171
|
99
|
82
|
Iowa
|
—
|
46
|
—
|
52
|
Kansas
|
11
|
64
|
—
|
50
|
Kentucky
|
3
|
140
|
36
|
100
|
Louisiana
|
65
|
64
|
—
|
31
|
Maine
|
5
|
15
|
—
|
8
|
Maryland
|
—
|
114
|
17
|
30
|
Massachusetts
|
71
|
22
|
—
|
6
|
Michigan
|
21
|
252
|
112
|
81
|
Minnesota
|
—
|
69
|
84
|
2
|
Mississippi
|
8
|
88
|
3
|
23
|
Missouri
|
23
|
57
|
4
|
76
|
Montana
|
—
|
17
|
—
|
18
|
Nebraska
|
—
|
34
|
—
|
50
|
Nevada
|
—
|
45
|
—
|
35
|
New
Hampshire
|
4
|
22
|
—
|
1
|
New
Jersey
|
21
|
120
|
18
|
10
|
New
Mexico
|
—
|
38
|
—
|
31
|
New
York
|
66
|
157
|
1
|
90
|
North
Carolina
|
40
|
211
|
60
|
82
|
North
Dakota
|
—
|
9
|
—
|
14
|
Ohio
|
79
|
352
|
106
|
185
|
Oklahoma
|
—
|
38
|
—
|
95
|
Oregon
|
20
|
33
|
22
|
17
|
Pennsylvania
|
79
|
180
|
92
|
60
|
Rhode
Island
|
9
|
11
|
—
|
—
|
South
Carolina
|
—
|
132
|
13
|
58
|
South
Dakota
|
—
|
9
|
—
|
15
|
Tennessee
|
—
|
181
|
55
|
57
|
Texas
|
75
|
323
|
71
|
109
|
Utah
|
57
|
28
|
33
|
38
|
Vermont
|
—
|
5
|
—
|
—
|
Virginia
|
52
|
166
|
2
|
108
|
Washington
|
27
|
45
|
25
|
40
|
West
Virginia
|
22
|
51
|
1
|
34
|
Wisconsin
|
—
|
63
|
4
|
86
|
Wyoming
|
—
|
14
|
1
|
15
|
District
of Columbia
|
—
|
4
|
—
|
—
|
Domestic
Subtotal
|
1,268
|
4,637
|
1,176
|
2,457
|
|
Wendy’s
|
Arby’s
|
Country/Territory
|
Company
|
Franchise
|
Company
|
Franchise
|
Aruba
|
—
|
3
|
—
|
—
|
Bahamas
|
—
|
7
|
—
|
—
|
Canada
|
138
|
235
|
—
|
114
|
Cayman
Islands
|
—
|
3
|
—
|
—
|
Costa
Rica
|
—
|
4
|
—
|
—
|
Dominican
Republic
|
—
|
2
|
—
|
—
|
El
Salvador
|
—
|
14
|
—
|
—
|
Guam
|
—
|
2
|
—
|
—
|
Guatemala
|
—
|
7
|
—
|
—
|
Honduras
|
—
|
29
|
—
|
—
|
Indonesia
|
—
|
23
|
—
|
—
|
Jamaica
|
—
|
3
|
—
|
—
|
Japan
|
—
|
75
|
—
|
—
|
Malaysia
|
—
|
7
|
—
|
—
|
Mexico
|
—
|
14
|
—
|
—
|
New
Zealand
|
—
|
15
|
—
|
—
|
Panama
|
—
|
5
|
—
|
—
|
Philippines
|
—
|
31
|
—
|
—
|
Puerto
Rico
|
—
|
66
|
—
|
—
|
Qatar
|
—
|
—
|
—
|
1
|
Turkey
|
—
|
—
|
—
|
7
|
United
Arab Emirate
|
—
|
—
|
—
|
1
|
Venezuela
|
—
|
40
|
—
|
—
|
U.
S. Virgin Islands
|
—
|
2
|
—
|
—
|
International
Subtotal
|
138
|
587
|
—
|
123
|
Grand
Total
|
1,406
|
5,224
|
1,176
|
2,580
|
Item 3. Legal
Proceedings.
In
November 2002, Access Now, Inc. and Edward Resnick, later replaced by Christ
Soter Tavantzis, on their own behalf and on the behalf of all those similarly
situated, brought an action in the United States District Court for the Southern
District of Florida against RTM Operating Company (“RTM”), which became a
subsidiary of ours following our acquisition of the RTM Restaurant Group in July
2005. The complaint alleged that the approximately 775 Arby’s
restaurants owned by RTM and its affiliates failed to comply with Title III of
the ADA. The plaintiffs requested class certification and injunctive
relief requiring RTM and such affiliates to comply with the ADA in all of their
restaurants. The complaint did not seek monetary damages, but did
seek attorneys’ fees. Without admitting liability, RTM entered into a
settlement agreement with the plaintiffs on a class-wide basis, which was
approved by the court on August 10, 2006. The settlement agreement
calls for the restaurants owned by RTM and certain of its affiliates to be
brought into ADA compliance over an eight year period at a rate of approximately
100 restaurants per year. The settlement agreement also applies to
restaurants subsequently acquired by RTM and such affiliates. ARG
estimates that it will spend approximately $1.15 million per year of capital
expenditures over a seven-year period commencing in 2008 to bring the
restaurants into compliance under the settlement agreement, in addition to
paying certain legal fees and expenses.
On April
25, 2008, a putative class action complaint was filed by Ethel Guiseppone, on
behalf of herself and others similarly situated, against Wendy’s, its directors,
the Company (then known as Triarc Companies, Inc.), and Trian Partners, in the
Franklin County, Ohio Court of Common Pleas. A motion for leave to file an
amended complaint was filed on June 19, 2008. The proposed amended complaint
alleged 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 on April 23, 2008, and failure to disclose material information
related to the merger in Amendment No. 3 to the Form S-4 under the Securities
Act of 1933 (the “Form S-4”). The proposed amended complaint sought
certification of the proceeding as a class action; preliminary and permanent
injunctions against disenfranchising the purported class and consummating the
merger; a declaration that the defendants breached their fiduciary duties; costs
and attorneys fees; and any other relief the court deems proper and
just.
Also on
April 25, 2008, a putative class action and derivative complaint was filed by
Cindy Henzel, on behalf of herself and others similarly situated, and
derivatively on behalf of Wendy’s, against Wendy’s and its directors in the
Franklin County, Ohio Court of Common Pleas. A motion for leave to file an
amended complaint was filed on June 16, 2008. The proposed amended complaint
alleges 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 on April 23, 2008, and failure to disclose material information
related to the merger in the Form S-4. The proposed amended complaint seeks
certification of the proceeding as a derivative and class action; an injunction
against consummating the merger and requiring the defendants to promptly hold an
annual meeting and to seek another merger partner; rescission of any
part
of the
merger agreement already implemented; a declaration that the defendants breached
their fiduciary duties; costs and attorneys fees; and any other relief the court
deems proper and just.
On May
22, 2008, a putative class action complaint was filed by Ronald Donald Smith, on
behalf of himself and others similarly situated, against Wendy’s and its
directors in the Franklin County, Ohio Court of Common Pleas. A motion for leave
to file an amended complaint was filed on June 30, 2008. The proposed amended
complaint alleged 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 on April 23, 2008, and failure to disclose material information
related to the merger in the Form S-4. The proposed amended complaint sought
certification of the proceeding as a derivative and class action; an injunction
against consummating the merger and requiring the defendants to promptly hold an
annual meeting and to seek another merger partner; rescission of any part of the
merger agreement already implemented; a declaration that the defendants breached
their fiduciary duties; costs and attorneys fees; and any other relief the court
deems proper and just.
On June
13, 2008, a putative class action complaint was filed by Peter D. Ravanis and
Dorothea Ravanis, on behalf of themselves and others similarly situated, against
Wendy’s, its directors, and Triarc Companies, Inc. in the Supreme Court of the
State of New York, New York County. An amended complaint was filed on June 20,
2008. The amended complaint alleges 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 on April 23, 2008, and failure to disclose
material information related to the merger in the Form S-4. The amended
complaint seeks certification of the proceeding as a class action; preliminary
and permanent injunctions against consummating the merger; other equitable
relief; attorneys’ fees; and any other relief the court deems proper and just.
All parties to this case have jointly requested that the court stay the action
pending resolution of the Ohio cases.
On July
9, 2008, the parties to the three Ohio actions described above filed a
stipulation and proposed order that would consolidate the cases, provide for the
proposed amended complaint in the Henzel case to be the operative complaint in
each of the cases, designate one law firm as lead plaintiffs’ counsel, and
establish an answer date for the defendants in the consolidated case. The court
entered the order as proposed in all three cases on July 9, 2008.
On August
13, 2008, counsel for the parties to the Guiseppone, Henzel, Smith and Ravanis
cases described above entered into a memorandum of understanding in which they
agreed upon the terms of a settlement of all such lawsuits, which would include
the dismissal with prejudice, and release, of all claims against all the
defendants, including Wendy’s, its directors, us and Trian Partners. In
connection with the settlement, Wendy’s agreed to make certain additional
disclosures to its shareholders, which were contained in the Form S-4 and to pay
plaintiffs’ legal fees.
On January 30, 2009 the parties entered into a Class and
Derivative Action Stipulation of Settlement. The settlement is subject to
approval by the Common Pleas of Court of Franklin County, Ohio. On January
30, 2009, the plaintiffs submitted an application for an order preliminarily
approving the settlement, certifying a class for settlement purposes only,
providing for notice to the class and setting a final settlement
hearing. The court has not yet ruled on that
application. Although we expect the court to approve the settlement,
there can be no assurance that the court will do so. If the court
withholds approval, the proposed settlement may be terminated.
The
defendants believe that the Guiseppone, Henzel, Smith and Ravanis cases
described above are without merit and intend to vigorously defend them in the
event that court approval is not obtained. While we do not believe that
these actions will have a material adverse effect on our financial condition or
results of operations, unfavorable rulings could occur. Were an unfavorable
ruling to occur, there exists the possibility of a material adverse impact on
our results of operations for the period in which the ruling occurs or for
future periods.
In
addition to the legal matters described above and the environmental matter
described under “Item 1. Business--General--Environmental Matters”, we are
involved in other litigation and claims incidental to our current and prior
businesses. We and our subsidiaries have reserves for all of our
legal and environmental matters aggregating $6,943,000 as of December 28,
2008. 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 our currently available information, including legal defenses available to us
and/or our subsidiaries, and given the aforementioned reserves and our insurance
coverages, 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.
Item
4. Submission of
Matters to a Vote of Security Holders.
On September 15, 2008, the Company held
its Annual Meeting of Stockholders. The matters acted upon by the
stockholders at that meeting were reported in our Quarterly Report on Form 10-Q
for the fiscal quarter ended September 28, 2008.
PART
II
Item 5. Market for
Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
The
principal market for our Class A Common Stock is the New York Stock Exchange
(symbol: WEN). Prior to the Wendy’s Merger on September 29, 2008, the principal
market for our Class A Common Stock and Class B Common Stock was the New
York Stock Exchange (symbols: TRY and TRY.B, respectively). In
connection with the Wendy’s Merger, our Class B Common Stock was converted to
Class A Common Stock. The high and low market prices for our Class A Common
Stock and former Class B Common Stock, as reported in the consolidated
transaction reporting system, are set forth below:
|
MARKET
PRICE
|
FISCAL
QUARTERS
|
CLASS A
|
|
CLASS B
|
|
HIGH
|
|
LOW
|
|
HIGH
|
|
LOW
|
2008
|
|
|
|
|
|
|
|
First
Quarter ended March 30
|
$ 9.82
|
|
$ 6.47
|
|
$ 10.11
|
|
$ 6.76
|
Second
Quarter ended June 29
|
7.35
|
|
5.88
|
|
7.91
|
|
5.90
|
Third
Quarter ended September 28
|
6.65
|
|
4.75
|
|
7.06
|
|
4.72
|
Fourth
Quarter ended December 28
|
6.90
|
|
2.63
|
|
6.75
(a)
|
|
4.20
(a)
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
First
Quarter ended April 1
|
21.99
|
|
18.13
|
|
20.55
|
|
16.65
|
Second
Quarter ended July 1
|
19.74
|
|
15.64
|
|
18.99
|
|
15.25
|
Third
Quarter ended September 30
|
16.22
|
|
12.17
|
|
16.90
|
|
11.38
|
Fourth
Quarter ended December 30
|
14.50
|
|
7.89
|
|
15.00
|
|
7.82
|
(a) In connection with the Wendy’s Merger
effective September 29, 2008, Wendy’s/Arby’s stockholders approved a charter
amendment to convert each share of the then existing Triarc Class B common stock
into one share of Wendy’s/Arby’s Class A Common Stock. The prices for the fourth
quarter of 2008 are for the September 29 trading day only.
Our Class A Common Stock is entitled
to one vote per share on all matters on which stockholders are entitled to vote.
Prior to the Wendy’s Merger, our Class B Common Stock was entitled to one-tenth
of a vote per share. Our Class B Common Stock was also entitled to
vote as a separate class with respect to any merger or consolidation in which
the Company was a party unless each holder of a share of Class B Common Stock
received the same consideration as a holder of Class A Common Stock, other than
consideration paid in shares of common stock that differed as to voting rights,
liquidation preference and dividend preference to the same extent that our Class
A and Class B Common Stock differed. In accordance with the
Certificate of Designation for our Class B Common Stock, and resolutions adopted
by our board of directors on June 5, 2007, our Class B Common Stock was
entitled, through March 30, 2008, to receive regular quarterly cash dividends
equal to at least 110% of any regular quarterly cash dividends paid on our Class
A Common Stock. Thereafter, each share of our Class B Common Stock
was entitled to at least 100% of the regular quarterly cash dividend paid on
each share of our Class A Common Stock. In addition, our Class B
Common Stock had a $.01 per share preference in the event of any liquidation,
dissolution or winding up of the Company and, after each share of our Class A
Common Stock also received $.01 per share in any such liquidation, dissolution
or winding up, our Class B Common Stock would thereafter participate equally on
a per share basis with our Class A Common Stock in any remaining assets of the
Company.
During our 2008 and 2007 fiscal years,
we paid regular quarterly cash dividends of $0.08 and $0.09 per share on our
Class A Common Stock and Class B Common Stock, respectively, through
June 16, 2008. The dividend declared on September 19, 2008 and paid on October
3, 2008 for both Class A and Class B common stock was for $0.08 per share. The
dividend declared on December 1, 2008 and paid on December 15, 2008 was for
$0.015 per share of Class A Common Stock.
The company declared a dividend of
$0.015 per share of Class A Common Stock on March 13, 2009 with a record date of
March 20, 2009 and payment date of March 30, 2009.
Although
we currently intend to continue to declare and pay regular quarterly cash
dividends, there can be no assurance that any additional regular quarterly cash
dividends will be declared or paid or the amount or timing of such dividends, if
any. Any future dividends will be made at the discretion of our board
of directors and will be based on such factors as our earnings, financial
condition, cash requirements and other factors.
Our
ability to meet our cash requirements is primarily dependent upon our cash, cash
equivalents and short-term investments on hand, cash flows from ARG and Wendy’s,
including loans, cash dividends, reimbursement by ARG to us in connection with
providing certain management services, and payments by ARG and Wendy’s under tax
sharing agreements, as well as investment income. Our cash requirements include,
but are not limited to, interest and principal payments on our indebtedness as
well as required quarterly payments to a management company formed by certain
former executives of ours. Under the terms of the
amended
and restated Credit Agreement (see “Item 1A. Risk Factors—Risks Related to
Wendy’s and Arby’s Businesses – Wendy’s International, Inc. and its
subsidiaries, and ARG and its subsidiaries, are subject to various restrictions,
and substantially all of their non-real estate assets are pledged subject to
certain restrictions, under a Credit Agreement”), there are restrictions on the
ability of the Co-Borrowers to pay any dividends or make any loans or advances
to us. The ability of Wendy’s and ARG to pay cash dividends or make
any loans or advances as well as to make payments for the management services
and under the tax sharing agreement to us is also dependent upon their ability
to achieve sufficient cash flows after satisfying their cash requirements,
including debt service. See Note 10 of the
Financial Statements and Supplementary Data included in Item 8 herein, and
“Management’s Discussion and Analysis – Results of Operations and Liquidity and
Capital Resources” in Item 7 herein, for further information on the Credit
Agreement.
As of
February 27, 2009, there were approximately 46,024 holders of record of our
Class A Common Stock. We have
no class of equity securities currently issued and outstanding except for our
Class A Common Stock, Series 1. However, we are currently authorized
to issue up to 100 million shares of preferred stock.
The
following table provides information with respect to repurchases of shares of
our common stock by us and our “affiliated purchasers” (as defined in Rule
10b-18(a)(3) under the Securities Exchange Act of 1934, as amended) during the
fourth fiscal quarter of 2008:
Issuer
Repurchases of Equity Securities
Period
|
Total
Number of Shares Purchased (1)
|
Average
Price Paid per Share (1)
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plan
(2)
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plan
(2)
|
|
|
|
|
|
|
September
29, 2008
through
October
26, 2008
|
591,257
|
$4.80
|
|
---
|
$50,000,000
|
October
27, 2008
through
November
23, 2008
|
28,248
|
$3.51
|
|
---
|
$50,000,000
|
November
24, 2008
through
December
28, 2008
|
49,395,394
|
$4.15
|
|
---
|
$50,000,000
|
Total
|
50,014,899
|
$4.16
|
|
---
|
$50,000,000
|
(1)
|
Includes
619,505 shares re-acquired by the Company from holders of restricted stock
awards, either to satisfy tax withholding requirements or upon forfeiture
of non-vested shares. Also included are 49,395,394 shares of
Class A Common Stock which were purchased by affiliates of the
Company in conjunction with a partial tender offer at a price of $4.15 per
share. The shares were valued at the closing prices of our
Class A Common Stock, Series 1, on the dates of
activity.
|
(2)
|
On
July 1, 2007 a new stock repurchase program became effective pursuant to
which we were authorized to repurchase up to $50 million of our Class A
Common Stock and/or Class B Common Stock during the period from July 1,
2007 through and including December 28, 2008 when and if market conditions
warranted and to the extent legally permissible. No
transactions were effected under our stock repurchase program during the
fourth fiscal quarter of 2008. This repurchase program expired on December
28, 2008 in accordance with its terms and has not been extended for the
2009 fiscal year.
|
Item
6. Selected
Financial Data.
Year Ended (1)
|
|
December
28, 2008
|
|
|
December
30, 2007(2)
|
|
|
December
31, 2006(2)
|
|
|
January
1, 2006(2)
|
|
|
January
2, 2005(2)
|
|
(In
millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
1,662.3 |
|
|
$ |
1,113.4 |
|
|
$ |
1,073.3 |
|
|
$ |
570.8 |
|
|
$ |
205.6 |
|
Franchise
revenues
|
|
|
160.5 |
|
|
|
87.0 |
|
|
|
82.0 |
|
|
|
91.2 |
|
|
|
100.9 |
|
Asset
management and related fees
|
|
|
- |
|
|
|
63.3 |
|
|
|
88.0 |
|
|
|
65.3 |
|
|
|
22.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
1,822.8 |
|
|
|
1,263.7 |
|
|
|
1,243.3 |
|
|
|
727.3 |
|
|
|
328.6 |
|
Operating
(loss) profit
|
|
|
(413.6 |
)(5) |
|
|
19.9 |
(6) |
|
|
44.6 |
|
|
|
(31.4 |
)(8) |
|
|
2.6 |
|
(Loss)
income from continuing operations
|
|
|
(482.0 |
)(5) |
|
|
15.1 |
(6) |
|
|
(10.8 |
)(7) |
|
|
(58.5 |
)(8) |
|
|
1.4 |
(9) |
Income
from discontinued operations
|
|
|
2.2 |
|
|
|
1.0 |
|
|
|
- |
|
|
|
3.3 |
|
|
|
12.5 |
|
Net
(loss) income
|
|
|
(479.8 |
)(5) |
|
|
16.1 |
(6) |
|
|
(10.9 |
)(7) |
|
|
(55.2 |
)(8) |
|
|
13.8 |
(9) |
Basic
(loss) income per share(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
(3.06 |
) |
|
|
.15 |
|
|
|
(.13 |
) |
|
|
(.84 |
) |
|
|
.02 |
|
Discontinued
operations
|
|
|
.01 |
|
|
|
.01 |
|
|
|
- |
|
|
|
.05 |
|
|
|
.18 |
|
Net
(loss) income
|
|
|
(3.05 |
) |
|
|
.16 |
|
|
|
(.13 |
) |
|
|
(.79 |
) |
|
|
.20 |
|
Class
B common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
(1.26 |
) |
|
|
.17 |
|
|
|
(.13 |
) |
|
|
(.84 |
) |
|
|
.02 |
|
Discontinued
operations
|
|
|
.02 |
|
|
|
.01 |
|
|
|
- |
|
|
|
.05 |
|
|
|
.21 |
|
Net
(loss) income
|
|
|
(1.24 |
) |
|
|
.18 |
|
|
|
(.13 |
) |
|
|
(.79 |
) |
|
|
.23 |
|
Diluted
(loss) income per share(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
(3.06 |
) |
|
|
.15 |
|
|
|
(.13 |
) |
|
|
(.84 |
) |
|
|
.02 |
|
Discontinued
operations
|
|
|
.01 |
|
|
|
.01 |
|
|
|
- |
|
|
|
.05 |
|
|
|
.17 |
|
Net
income (loss)
|
|
|
(3.05 |
) |
|
|
.16 |
|
|
|
(.13 |
) |
|
|
(.79 |
) |
|
|
.19 |
|
Class
B common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
(1.26 |
) |
|
|
.17 |
|
|
|
(.13 |
) |
|
|
(.84 |
) |
|
|
.02 |
|
Discontinued
operations
|
|
|
.02 |
|
|
|
.01 |
|
|
|
- |
|
|
|
.05 |
|
|
|
.20 |
|
Net
income (loss)
|
|
|
(1.24 |
) |
|
|
.18 |
|
|
|
(.13 |
) |
|
|
(.79 |
) |
|
|
.22 |
|
Cash
dividends per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A common stock
|
|
|
.26 |
|
|
|
.32 |
|
|
|
.77 |
|
|
|
.29 |
|
|
|
.26 |
|
Class
B common stock
|
|
|
.26 |
|
|
|
.36 |
|
|
|
.81 |
|
|
|
.33 |
|
|
|
.30 |
|
Working
(deficiency) capital
|
|
|
(121.7 |
) |
|
|
(36.9 |
) |
|
|
161.2 |
|
|
|
295.6 |
|
|
|
462.6 |
|
Properties
|
|
|
1,770.4 |
|
|
|
504.9 |
|
|
|
488.5 |
|
|
|
443.9 |
|
|
|
103.4 |
|
Total
assets
|
|
|
4,645.6 |
|
|
|
1,454.6 |
|
|
|
1,560.4 |
|
|
|
2,809.5 |
|
|
|
1,067.0 |
|
Long-term
debt
|
|
|
1,081.2 |
|
|
|
711.5 |
|
|
|
701.9 |
|
|
|
894.5 |
|
|
|
446.5 |
|
Stockholders’
equity
|
|
|
2,383.3 |
|
|
|
448.9 |
|
|
|
477.8 |
|
|
|
398.3 |
|
|
|
305.5 |
|
Weighted
average shares outstanding(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A common stock
|
|
|
137.7 |
|
|
|
28.8 |
|
|
|
27.3 |
|
|
|
23.8 |
|
|
|
22.2 |
|
Class
B common stock
|
|
|
48.0 |
|
|
|
63.5 |
|
|
|
59.3 |
|
|
|
46.2 |
|
|
|
40.8 |
|
|
(1)
|
Wendy’s/Arby’s
Group, Inc. and its subsidiaries (the “Company”) reports on a fiscal year
consisting of 52 or 53 weeks ending on the Sunday closest to December
31. The financial position and results of operations of Wendy’s
International, Inc. (“Wendy’s”) are included commencing with the date of
the Wendy’s Merger, September 29, 2008. The financial position and results
of operations of RTM Restaurant Group (“RTM”) are included commencing with
its acquisition by the Company on July 25, 2005. Deerfield & Company
LLC (“Deerfield”), in which the Company held a 63.6% capital interest from
July 22, 2004 through its sale on December 21, 2007, Deerfield
Opportunities Fund, LLC (the “Opportunities Fund”), which commenced on
October 4, 2004 and in which our investment was effectively redeemed on
September 29, 2006, and DM Fund LLC, which commenced on March 1, 2005 and
in which our investment was effectively redeemed on December 31, 2006,
reported on a calendar year ending on December 31 through their respective
sale or redemption dates. In accordance with this method, each
of the Company’s fiscal years presented above contained 52 weeks except
for the 2004 fiscal year which contained 53 weeks. All
references to years relate to fiscal years rather than calendar
years.
|
|
(2)
|
Selected
financial data reflects the changes related to the adoption of the
following accounting standards:
|
(a) The
Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No.
48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) as of January 1,
2007. FIN 48 clarifies how uncertainties in income taxes should
be
reflected in financial statements in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” FIN 48
prescribes a recognition threshold and measurement attribute for financial
statement recognition and measurement of potential tax benefits associated with
tax positions taken or expected to be taken in income tax returns. FIN 48
prescribes a two-step process of evaluating a tax position, whereby an entity
first determines if it is more likely than not that a tax position will be
sustained upon examination, including resolution of any related appeals or
litigation processes, based on the technical merits of the position. A tax
position that meets the more-likely-than-not recognition threshold is then
measured for purposes of financial statement recognition as the largest amount
of benefit that is greater than 50 percent likely of being realized upon being
effectively settled. There was no effect on the 2007 or prior period statements
of operations upon the adoption of FIN 48. However, there was a net reduction of
$2.3 in stockholders’ equity as of January 1, 2007.
|
(b)
The Company adopted FASB Board Staff Position No. AUG AIR-1, “Accounting
for Planned Major Maintenance Activities” (“FSP AIR-1”) as of January 1,
2007. As a result, the Company accounts for scheduled major aircraft
maintenance overhauls in accordance with the direct expensing method under
which the actual cost of such overhauls is recognized as expense in the
period it is incurred. Previously, the Company accounted for scheduled
major maintenance activities in accordance with the accrue-in-advance
method under which the estimated cost of such overhauls was recognized as
expense in periods through the scheduled date of the respective overhaul
with any difference between estimated and actual cost recorded in results
from operations at the time of the actual overhaul. In accordance with the
retroactive application of FSP AIR-1, the Company has credited (charged)
$0.6, $0.7 and $(0.2) to operating profit (loss) and $0.4, $0.5 and
$(0.1) to income (loss) from continuing operations and net income (loss)
for 2006, 2005 and 2004,
respectively.
|
|
(c)
The Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment”
(“SFAS 123(R)”), which revised SFAS No. 123, “Accounting for Stock-Based
Compensation” (“SFAS 123”) effective January 2, 2006. As a result, the
Company now measures the cost of employee services received in exchange
for an award of equity instruments, including grants of employee stock
options and restricted stock, based on the fair value of the award at the
date of grant. The Company previously used the intrinsic value method to
measure employee share-based compensation. Under the intrinsic value
method, compensation cost for the Company’s stock options was measured as
the excess, if any, of the market price of the Company’s Class A common
stock (the “Class A Common Stock” or “Class A Common Shares”), and/or
Class B common stock, series 1 (the “Class B Common Stock” or “Class B
Common Shares”), as applicable, at the date of grant, or at any subsequent
measurement date as a result of certain types of modifications to the
terms of its stock options, over the amount an employee must pay to
acquire the stock. As the Company used the modified prospective adoption
method under SFAS 123(R), there was no effect from the adoption of this
standard on the financial statements for all periods presented prior to
the adoption date.
|
(3)
|
Income
(loss) per share amounts for 2008 reflects the conversion of Triarc
Companies, Inc. (“Triarc” and the former name of Wendy’s/Arby’s Group,
Inc.) Class B Common Stock into Wendy’s/Arby’s Class A Common Stock (the
“Conversion”) on September 29, 2008. In connection with the
Wendy’s
Merger,
Wendy’s/Arby’s stockholders approved a charter amendment to convert each
of the then existing
Triarc Class B Common Stock into one share of
Wendy’s/Arby’s Class
A Common Stock. For the purposes of
calculating income per share, net income was allocated between the shares
of the Company’s Class A Common Stock and the Company’s Class B
Common Stock based on the actual dividend payment ratio. For the purposes
of calculating loss per share, the net loss for any year was allocated
equally through the Conversion
date.
|
|
(4)
|
The
number of shares used in the calculation of diluted income (loss) per
share is the same as basic income (loss) per share for 2008, 2006 and 2005
since all potentially dilutive securities would have had an antidilutive
effect based on the loss from continuing operations for these
years. The
numbers of shares used in the calculation of diluted income per share of
the
Company’s
Class A and the
Company’s Class B Common Stock for 2007 are 28,965 and
64,282 respectively. The number of shares used in the
calculation of diluted income per share of the Company’s Class A and the
Company’s Class B Common Stock for 2004 are 23,415 and 43,206,
respectively. These shares used
for the calculation of diluted income per share in 2007 and 2004 consist
of the weighted average common shares outstanding for each class of common
stock and potential shares of common stock reflecting the effect of
dilutive stock options and nonvested restricted shares of 129 for
the
Company’s Class
A Common
Stock and 759 for
the Company’s Class
B Common Stock in
2007, and 1,182 for the Company’s Class A Common
Stock and 2,366 for
the Company’s Class
B Common Stock in
2004.
|
|
(5)
|
Reflects
certain significant charges and credits recorded during 2008 as follows:
$460.1 charged to operating profit consisting of a goodwill impairment for
the Arby’s Company-owned restaurant reporting unit; $484.0 charged to
income from continuing operations and net income representing the
aforementioned $460.1 charged to operating profit and other than temporary
losses on investments of $112.7 partially offset by $88.8 of income tax
benefit related to the above
charges.
|
|
(6)
|
Reflects
certain significant charges and credits recorded during 2007 as follows:
$45.2 charged to operating profit, consisting of facilities relocation and
corporate restructuring costs of $85.4 less $40.2 from the gain on sale of
the Company’s interest in Deerfield; $16.6 charged to income from
continuing operations and net income representing the aforementioned $45.2
charged to operating profit offset by $15.8 of income tax benefit related
to the above charge, and a $12.8 previously unrecognized prior year
contingent tax benefit related to certain severance obligations to certain
of the Company’s former executives.
|
|
(7)
|
Reflects
a significant charge recorded during 2006 as follows: $9.0 charged to loss
from continuing operations and net loss representing a $14.1 loss on early
extinguishments of debt related to conversions or effective conversions of
the Company’s 5% convertible notes due 2023 and prepayments of term loans
under the Company’s senior secured term loan facility, partially offset by
an income tax benefit of $5.1 related to the above
charge.
|
|
(8)
|
Reflects
certain significant charges and credits recorded during 2005 as follows:
$58.9 charged to operating loss representing (1) share-based compensation
charges of $28.3 representing the intrinsic value of stock options which
were exercised by the Chairman and then Chief Executive Officer and the
Vice Chairman and then President and Chief Operating Officer and
subsequently replaced on the date of exercise, the grant of contingently
issuable performance-based restricted shares of the Company’s Class A and
Class B common stock and the grant of equity interests in two of the
Company’s then subsidiaries, (2) a $17.2 loss on settlements of
unfavorable franchise rights representing the cost of settling franchise
agreements acquired as a component of the acquisition of RTM with royalty
rates below the 2005 standard 4% royalty rate that the Company receives on
new franchise agreements and (3) facilities relocation and corporate
restructuring charges of $13.5; $67.5 charged to loss from continuing
operations representing the aforementioned $58.9 charged to operating loss
and a $35.8 loss on early extinguishments of debt upon a debt refinancing
in connection with the acquisition of RTM, both partially offset by $27.2
of income tax benefit relating to the above charges; and $64.2 charged to
net loss representing the aforementioned $67.5 charged to loss from
continuing operations partially offset by income from discontinued
operations of $3.3 principally resulting from the release of reserves for
state income taxes that were no longer
required.
|
|
(9)
|
Reflects
certain significant credits recorded during 2004 as follows: $17.3
credited to income from continuing operations representing (1) $14.6 of
income tax benefit due to the release of income tax reserves which were no
longer required upon the finalization of the examination of certain of the
Company’s prior year’s Federal income tax returns, the finalization of a
state income tax examination and the expiration of the statute of
limitations for the examination of certain of the Company’s state income
tax returns and (2) a $2.7 credit, net of a $1.6 income tax provision,
representing the release of related interest accruals that were no longer
required; and $29.8 credited to net income representing the aforementioned
$17.3 credited to income from continuing operations and $12.5 of
additional gain on disposal of the Company’s beverage businesses that were
previously sold resulting from the release of income tax reserves related
to discontinued operations which were no longer required upon finalization
of an Internal Revenue Service examination of certain prior year’s Federal
income tax returns and the expiration of the statute of limitations for
examinations of certain of the Company’s state income tax
returns.
|
Item 7.
|
Management's Discussion and
Analysis of Financial Condition and Results of
Operations.
|
Effective
September 29, 2008, in conjunction with the merger (“Wendy’s Merger”) with
Wendy’s International, Inc. (“Wendy’s”) described below under “Introduction and
Executive Overview – Merger with Wendy’s International, Inc.”, the corporate
name of Triarc Companies, Inc., (“Triarc”), changed to Wendy’s/Arby’s Group,
Inc. (“Wendy’s/Arby’s” or, together with its subsidiaries, the “Company” or
“we”). The references to the “Company” or “we” for periods prior to
September 29, 2008 refer to Triarc and its subsidiaries. Certain
statements we make under this Item 7 constitute “forward-looking statements”
under the Private Securities Litigation Reform Act of 1995. See “Special Note
Regarding Forward-Looking Statements and Projections” in “Part 1” preceding
“Item 1 - Business.” You should consider our forward-looking
statements in light of the risks discussed under the heading “Risk Factors” in
Item 1A above as well as our consolidated financial statements, related notes,
and other financial information appearing elsewhere in this report and our other
filings with the Securities and Exchange Commission.
This
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of the Company should be read in conjunction with the consolidated
financial statements and the related notes that appear elsewhere within this
report.
Because
the merger with Wendy’s did not occur until the first day of our 2008 fourth
quarter, only the fourth quarter results of operations of Wendy’s are included
in this report. The results of operations discussed below will not be
indicative of future results due to the consummation of the merger transaction
with Wendy’s as well as the 2007 sale of our interest in Deerfield & Company
LLC (“Deerfield”) discussed below.
Introduction
and Executive Overview
Our
Business
We currently manage and
internally report our operations as
two business
segments, the operation and
franchising of Wendy’s restaurants and the operation and
franchising of Arby’s restaurants. In
2007, we also operated in the asset management business through our 63.6%
capital interest in Deerfield, which was sold on December 21, 2007 to Deerfield
Capital Corp. (“DFR”). As a result of this sale, our 2008 financial
statements include only the financial position, results of operations and cash
flows from the restaurant businesses.
Restaurant
business revenues for 2008 include: (1) $1,632.9 million recognized upon
delivery of food to the customer, (2) $29.4 million from the sale of bakery
items and kid’s meal promotion items to our franchisees, (3) $149.5 million from
royalty income from franchisees, (4) $7.6 million from rental income from
properties leased to franchisees, and (5) $3.4 million from franchise and
related fees. Our
revenues increased significantly in the 2008 fourth quarter due to the Wendy’s
Merger. The Wendy’s royalty rate was 4.0% for the quarter
ended December 28, 2008. While over 78% of our existing Arby’s
royalty agreements and substantially all of our new domestic royalty agreements
provide for royalties of 4% of franchise revenues, our average Arby’s royalty
rate was 3.6% for the year ended December 28, 2008. In our former
asset management business, revenues were derived through the date of the
Deerfield Sale in the form of asset management and related fees from our
management of (1) collateralized debt obligation vehicles, (“CDOs”), and (2)
investment funds and private investment accounts (“Funds”).
In our
discussions of “Sales” and “Franchise Revenues” below, we discuss North American
same-store sales. Beginning in 2008, we have been reporting Arby’s
same-store sales commencing after a store has been open for fifteen continuous
months (the “Fifteen Month Method”) consistent with the metrics used by our
management for internal reporting and analysis. Prior thereto, and
including the 2007 fiscal year, the calculation of same-store sales commenced
after a store was open for twelve continuous months (the “Twelve Month
Method”). Wendy’s 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. The tables summarizing the results of operations below
provide the same-store sales percentage change using the current Fifteen Month
Methods, as well as our former Twelve Month Method for Arby’s.
Our
primary goal is to enhance the value of our Company by:
|
·
|
improving
the quality and affordability of our core menu
items;
|
|
·
|
increasing
traffic in the restaurants and revitalizing the Wendy’s and Arby’s brands
with new marketing programs, menu development and an improved customer
experience;
|
|
·
|
improving
company-owned restaurant margins;
|
|
·
|
achieving
significant progress on synergies and efficiencies resulting from the
Wendy’s Merger;
|
|
·
|
reducing
capital spending to maximize cash
flow;
|
|
·
|
expanding
the breakfast daypart at many of our restaurants over the next several
years; and
|
|
·
|
the
possibility of acquiring other restaurant
brands.
|
Our
restaurant businesses have recently experienced trends in the following
areas:
Revenues
|
·
|
Significant
decreases in general consumer confidence in the economy as well as
decreases in many consumers’ discretionary income caused by factors such
as continuing deterioration in the financial markets and in economic
conditions, including high unemployment levels and significant
displacement in the real estate market, significant fluctuations in fuel
costs, and high food costs;
|
|
·
|
Increasing
price competition in the quick service restaurant (“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) many recent product promotions focused on lower prices of
certain menu 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 prepared and
take-out food purchases;
|
|
·
|
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 more
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.
|
|
·
|
Higher
commodity prices which have increased our food costs during 2008, but have
recently moderated;
|
|
·
|
The
recent volatility in fuel prices which, when at much higher than current
levels, contributed to an increase in utility costs and distribution
costs;
|
|
·
|
Federal,
state and local legislative activity, such as minimum wage increases and
mandated health and welfare benefits which have and are 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 result in increased operating
costs.
|
|
·
|
Continued
competition for development sites among QSR competitors and other
businesses and higher development costs associated with those sites;
and
|
|
·
|
Tightening
of the overall credit markets and higher borrowing costs in the lending
markets typically used to finance new unit development and
remodels. These tightened credit conditions could negatively
impact the renewal of franchisee licenses as well as the ability of a
franchisee to meet its commitments under development, rental and franchise
license agreements.
|
|
|
|
|
·
|
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. |
Merger
with Wendy’s International, Inc.
On
September 29, 2008, we completed the Wendy’s Merger in an all-stock transaction
in which Wendy’s shareholders received a fixed ratio of 4.25 shares of
Wendy’s/Arby’s Class A Common Stock for each share of Wendy’s common stock
owned. We expect that the Wendy’s Merger will better position the
Company to deliver long-term value to our stockholders through enhanced
operational efficiencies, improved product offerings, and shared
services. Wendy’s operates, develops and franchises a system of
distinctive quick service restaurants specializing in hamburgers. At
September 28, 2008, there were 6,625 Wendy’s restaurants in operation in the
United States and in 21 other countries and U.S. territories. Of these
restaurants, 1,404 were operated by Wendy’s and 5,221 by Wendy’s
franchisees.
In the
Wendy’s Merger, 376.8 million shares of Wendy’s/Arby’s common stock, formerly
Triarc Class A Common Stock, were issued to Wendy’s shareholders. The
equity consideration is based on the 4.25 conversion factor of the Wendy’s
outstanding shares at a value of $6.57 per share which represents the average
closing market price of Triarc Class A Common Stock two days before and after
the merger announcement date of April 24, 2008. In addition,
immediately prior to the Wendy’s Merger, our Class B Common Stock was converted
into Class A Common Stock on a one-for-one basis (the
“Conversion”).
Outstanding
Wendy’s stock options were converted upon completion of the Wendy’s Merger into
stock options with respect to Wendy’s/Arby’s common stock, based on the 4.25:1
exchange ratio.
Our
consolidated financial statements include the accounts of Wendy’s subsequent to
September 29, 2008.
The
Deerfield Sale
On
December 21, 2007, we completed the sale of our majority capital interest in
Deerfield resulting in non-cash proceeds aggregating $134.6 million,
consisting of 9.6 million shares of convertible preferred stock of DFR (“the DFR
Preferred Stock”) with a then estimated fair value of $88.4 million and $48.0
million principal amount of series A senior secured notes of DFR due in December
2012 (the “DFR Notes”) with a then estimated fair value of $46.2
million. We also retained ownership of 0.2 million common shares in
DFR as part of a pro rata distribution to the members of Deerfield prior to the
Deerfield Sale. The Deerfield Sale resulted in a pretax gain of $40.2
million which was recorded in the fourth quarter of 2007. At December
30, 2007, the carrying value of the DFR Preferred Stock was $70.4 million, net
of a deferred gain of $6.9 million for our then remaining interest in
Deerfield.
The DFR
Notes bear interest at the three-month LIBOR (1.47% at December 28, 2008) plus a
factor, initially 5% through December 31, 2009, increasing 0.5% each quarter
from January 1, 2010 through June 30, 2011 and 0.25% each quarter from July 1,
2011 through their maturity. The DFR Notes are secured by certain
equity interests of DFR and certain of its subsidiaries.
Conversion
of Convertible Preferred Stock and Dividend of DFR Common Stock
On March
11, 2008, DFR stockholders approved the one-for-one conversion of all its
outstanding convertible preferred stock into DFR common stock which converted
the 9.6 million preferred shares we held into a like number of shares of common
stock. On March 11, 2008, our Board of Directors approved the distribution of
our 9.8 million shares of DFR common stock, which also included the 0.2 million
common shares of DFR discussed above, to our stockholders. The dividend, which
was valued at $14.5 million, was paid on
April 4,
2008 to holders of record of our Class A common stock (the “Class A Common
Stock”) and our Class B common stock (the “Class B Common Stock”) on
March 29, 2008.
Other
than Temporary Losses and Equity in Losses of DFR
On March
18, 2008, in response to unanticipated credit and liquidity events in the first
quarter of 2008, DFR announced that it was repositioning its investment
portfolio to focus on agency-only residential mortgage-backed securities and
away from its principal investing segment to its asset management segment with
its fee-based revenue streams. In addition, it stated that during the
first quarter of 2008, its portfolio was adversely impacted by deterioration of
the global credit markets and, as a result, it sold $2,800.0 million of its
agency and $1,300.0 million of its AAA-rated non-agency mortgage-backed
securities and reduced the net notional amount of interest rate swaps used to
hedge a portion of its mortgage-backed securities by $4,200.0 million, all at a
net after-tax loss of $294.3 million to DFR.
Based on
the events described above and their negative effect on the market price of DFR
common stock, we concluded that the fair value and, therefore, the carrying
value of our investment in the 9.8 million common shares were impaired. As a
result, as of March 11, 2008, we recorded an other than temporary loss which is
included in “Other than temporary losses on investments,” of $67.6 million
(without tax benefit as described below) which included $11.1 million of pre-tax
unrealized holding losses previously recorded as of December 30, 2007 which were
included in “Accumulated other comprehensive income (loss)”, a component of
stockholder’s equity. These common shares were considered
available-for-sale securities due to the limited period they were to be held as
of March 11, 2008 (the “Determination Date”) before the dividend distribution of
the shares to our stockholders. We also recorded an additional
impairment charge from March 11, 2008 through the March 29, 2008 record date of
the dividend of $0.5 million. As a result of the dividend, the income tax loss
that resulted from the decline in value of our investment of $68.1 million is
not deductible for income tax purposes and no income tax benefit was recorded
related to this loss.
Additionally,
from December 31, 2007 through the Determination Date, we recorded approximately
$0.8 million of equity in net losses of DFR which are included in “Other
expense, net” related to our investment in the 0.2 million common shares of DFR
discussed above which were accounted for using the Equity Method through the
Determination Date.
DFR
Notes
The
dislocation in the mortgage sector and continuing weakness in the broader
financial market has adversely impacted, and may continue to adversely impact,
DFR’s cash flows. DFR reported operating losses for the first nine
months of 2008. Updated
financial information from DFR for the year ended December 31, 2008 will not be
available until the filing of DFR’s Form 10-K expected to be filed on March 16,
2009.
We have
received timely and full cash payment of all four quarterly interest payments
due on the DFR Notes to date. Additionally, in October 2008 we
received a $1.1 million dividend payment on the convertible preferred stock
which we previously held. Based on the Deerfield Sale agreement,
payment of a dividend by DFR on this preferred stock was dependent on DFR’s
board of directors declaring and paying a dividend on DFR’s common
stock. The first dividend to be declared on their common stock
following the date of the Deerfield Sale was declared by DFR and recognized by
us in our 2008 third quarter and paid in October 2008. Certain
expenses totaling $6.2 million related to the Deerfield Sale, which were a
liability of the Company and for which we had an equal offsetting receivable
from DFR as of December 30, 2007, were paid by DFR during the first half of
2008. Accordingly, we did not record any allowance for doubtful
collection on these notes prior to the fourth quarter of 2008.
Due to
significant financial weakness in the credit markets, current publicly available
information of DFR, and our ongoing assessment of the likelihood of full
repayment of the principal amount of the DFR Notes, we recorded an allowance for
doubtful collectability of $21.2 million on the DFR Notes in the fourth quarter
of 2008. This charge is included in “Other than temporary losses on
investments.”
Other
In early
2008, we completed the transition that was announced in April 2007 whereby we
closed our New York headquarters and combined our corporate operations with our
restaurant operations in Atlanta, Georgia (the “Corporate Restructuring”). To
facilitate this transition, we had entered into contractual settlements (the
“Contractual Settlements”) with our Chairman, who was also our then Chief
Executive Officer, and our Vice Chairman, who was our then President and Chief
Operating Officer, (collectively, the “Former Executives”) evidencing the
termination of their employment agreements and providing for their resignation
as executive officers as of June 29, 2007 (the “Separation Date”). In
addition, we sold properties and other assets at our former New York
headquarters in 2007 to an affiliate of the Former Executives and we incurred
charges for the transition severance arrangements of other New York
headquarters’ executives and employees who continued to provide services as
employees through the 2008 first quarter. The Corporate Restructuring
included the transfer of substantially all of our senior executive
responsibilities to the executive team of Arby’s Restaurant Group, Inc. (“ARG”),
a wholly-owned subsidiary of ours, in Atlanta,
Georgia.
We also
maintain an investment portfolio principally from the investment of our excess
cash with the objective of generating investment income, including an account
(the “Equities Account”) which is managed by a management company (the
“Management Company”) formed by the Former Executives and a director, who was
also our former Vice Chairman (collectively, the “Principals”). The
Equities Account is invested principally in equity securities, including
derivative instruments, of a limited number of publicly-traded
companies. In addition, the Equities Account sells securities short
and invests in market put options in order to lessen the impact of significant
market downturns. Investment income (loss) from this account includes
realized investment gains (losses) from marketable security transactions,
realized and unrealized gains (losses) on derivative instruments and securities
sold with an obligation to purchase, other than temporary losses, interest and
dividends. The Equities Account, including restricted cash
equivalents and equity derivatives, had a fair value of $37.7 million as of
December 28, 2008. The cost of available-for-sale securities within
the Equities Account has been reduced by $12.7 million included in “Other than
temporary losses on investments.” The fair value of the Equities Account at
December 28, 2008 excludes $47.0 million of restricted cash released from the
Equities Account to Wendy’s/Arby’s in 2008. We obtained permission from the
Management Company to release this amount from the Equities Account and we are
obligated to return this amount to the Equities Account by January 29,
2010. As of February 27, 2009, as a result of continuing weakness in
the economy during the first quarter of 2009 and its effect on the equity
markets, there has been a decrease of approximately $3.6 million in the fair
value of the available for sale securities held in the Equities Account as
compared to their value on December 28, 2008.
We also
had invested in several funds managed by Deerfield, including Deerfield
Opportunities Fund, LLC (“the Opportunities Fund”), and DM Fund LLC (“the DM
Fund”). Prior to 2006, we invested $100.0 million in the
Opportunities Fund and transferred $4.8 million of that amount to the DM
Fund. We redeemed our investments in the Opportunities Fund and the
DM Fund effective September 29, 2006 and December 31, 2006,
respectively. The Opportunities Fund through September 29, 2006 and
the DM Fund through December 31, 2006 were accounted for as consolidated
subsidiaries of ours, with minority interests to the extent of participation by
investors other than us. The Opportunities Fund was a multi-strategy
hedge fund that principally invested in various fixed income securities and
their derivatives and employed substantial leverage in its trading activities
which significantly impacted our consolidated financial position, results of
operations and cash flows. When we refer to Deerfield, we mean only
Deerfield & Company, LLC and not the Opportunities Fund or the DM
Fund.
Presentation
of Financial Information
Our
fiscal reporting periods consist of 52 weeks ending on the Sunday closest to
December 31 and are referred to herein as (1) “the year ended December 28, 2008”
or “2008” which commenced on December 31, 2007 and ended on December 28, 2008
(and includes Wendy’s for the fourth quarter of 2008), (2) “the year ended
December 30, 2007” or “2007” which commenced on January 1, 2007 and ended on
December 30, 2007 except that Deerfield is included from January 1, 2007 through
its December 21, 2007 sale date, and (3) “the year ended December 31, 2006” or
“2006” which commenced on January 2, 2006 and ended on December 31, 2006 except
that (a) Deerfield and the DM Fund are included on a calendar year basis and (b)
the Opportunities Fund is included from January 1, 2006 through its September
29, 2006 redemption date. Balances presented as of December 28, 2008
and December 30, 2007 are referred to herein as “as of Year-End 2008” and “as of
Year-End 2007,” respectively. With the exception of Deerfield, the
Opportunities Fund, and the DM Fund, which reported on a calendar year basis,
all references to years relate to fiscal periods rather than calendar periods.
The difference in reporting basis in 2006 is not material.
Results
of Operations
Presented
below is a table that summarizes our results of operations and compares the
amount of the change between 2008 and 2007 (the “2008
Change”). Certain percentage changes between these years are
considered not measurable or not meaningful (“n/m”).
|
|
|
|
|
|
|
|
2008 Change
|
|
|
|
2008
|
|
|
2007
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(In
Millions)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
1,662.3 |
|
|
$ |
1,113.4 |
|
|
$ |
548.9 |
|
|
|
49.3 |
% |
Franchise
revenues
|
|
|
160.5 |
|
|
|
87.0 |
|
|
|
73.5 |
|
|
|
84.5 |
% |
Asset
management and related fees
|
|
|
- |
|
|
|
63.3 |
|
|
|
(63.3 |
) |
|
|
(100.0 |
%) |
|
|
|
1,822.8 |
|
|
|
1,263.7 |
|
|
|
559.1 |
|
|
|
44.2 |
% |
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,415.5 |
|
|
|
894.5 |
|
|
|
521.0 |
|
|
|
58.2 |
% |
Cost
of services
|
|
|
- |
|
|
|
25.2 |
|
|
|
(25.2 |
) |
|
|
(100.0 |
%) |
General
and administrative
|
|
|
248.7 |
|
|
|
205.4 |
|
|
|
43.3 |
|
|
|
21.1 |
% |
Depreciation
and amortization
|
|
|
88.3 |
|
|
|
66.2 |
|
|
|
22.1 |
|
|
|
33.4 |
% |
Goodwill
impairment
|
|
|
460.1 |
|
|
|
- |
|
|
|
460.1 |
|
|
|
n/m |
|
Impairment
of other long-lived assets
|
|
|
19.2 |
|
|
|
7.1 |
|
|
|
12.1 |
|
|
|
n/m |
|
Facilities
relocation and corporate restructuring
|
|
|
3.9 |
|
|
|
85.4 |
|
|
|
(81.5 |
) |
|
|
(95.4 |
%) |
Gain
on sale of consolidated business
|
|
|
- |
|
|
|
(40.2 |
) |
|
|
40.2 |
|
|
|
100.0 |
% |
Other
operating income, net
|
|
|
0.7 |
|
|
|
0.2 |
|
|
|
0.5 |
|
|
|
n/m |
|
|
|
|
2,236.4 |
|
|
|
1,243.8 |
|
|
|
992.6 |
|
|
|
79.8 |
% |
Operating
(loss) profit
|
|
|
(413.6 |
) |
|
|
19.9 |
|
|
|
(433.5 |
) |
|
|
n/m |
|
Interest
expense
|
|
|
(67.0 |
) |
|
|
(61.3 |
) |
|
|
(5.7 |
) |
|
|
(9.3 |
%) |
Gain
on early extinguishments of debt
|
|
|
3.6 |
|
|
|
- |
|
|
|
3.6 |
|
|
|
n/m |
|
Investment
income, net
|
|
|
9.4 |
|
|
|
62.1 |
|
|
|
(52.7 |
) |
|
|
(84.9 |
%) |
Other
than temporary losses on investments
|
|
|
(112.7 |
) |
|
|
(9.9 |
) |
|
|
(102.8 |
) |
|
|
n/m |
|
Other
expense, net
|
|
|
(0.6 |
) |
|
|
(1.4 |
) |
|
|
0.8 |
|
|
|
57.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations before income taxes and minority
interests
|
|
|
(580.9 |
) |
|
|
9.4 |
|
|
|
(590.3 |
) |
|
|
n/m |
|
Benefit
from income taxes
|
|
|
99.3 |
|
|
|
8.4 |
|
|
|
90.9 |
|
|
|
n/m |
|
Minority
interests in income of consolidated subsidiaries
|
|
|
(0.3 |
) |
|
|
(2.7 |
) |
|
|
2.4 |
|
|
|
85.2 |
% |
(Loss)
income from continuing operations
|
|
|
(481.9 |
) |
|
|
15.1 |
|
|
|
(497.0 |
) |
|
|
n/m |
|
Income
from discontinued operations, net of income taxes:
|
|
|
2.2 |
|
|
|
1.0 |
|
|
|
1.2 |
|
|
|
n/m |
|
Net
(loss) income
|
|
$ |
(479.7 |
) |
|
$ |
16.1 |
|
|
$ |
(495.8 |
) |
|
|
n/m |
|
Restaurant
Statistics:
|
|
Wendy’s
same-store sales (a):
|
Fourth Quarter 2008
|
|
|
|
|
North
America Company-owned restaurants
|
3.6%
|
|
|
|
|
|
|
North
America Franchise restaurants
|
3.8%
|
|
|
|
|
|
|
North
America Systemwide
|
3.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fifteen Month Method
|
|
Twelve Month Method
|
Arby’s
same-store sales:
|
2008
|
|
2007
|
|
2008
|
|
2007
|
North
America Company-owned restaurants
|
(5.8)%
|
|
(1.3)%
|
|
(5.8)%
|
|
(1.5%)
|
North
America Franchised restaurants
|
(3.6)%
|
|
1.1%
|
|
(3.5)%
|
|
0.9%
|
North
America Systemwide
|
(4.3)%
|
|
0.3%
|
|
(4.3)%
|
|
0.1%
|
|
|
Restaurant
Margin:
|
|
|
|
|
Fourth Quarter
2008
|
|
|
Wendy’s
|
11.7%
|
|
|
|
|
|
|
|
|
|
|
Full Year
2008
|
2007
|
|
|
Arby’s
|
16.1%
|
19.7%
|
|
|
Restaurant
count:
|
Company-owned
|
|
Franchised
|
|
Systemwide
|
Wendy’s
restaurant count (a):
|
|
|
|
|
|
Restaurant
count at September 29, 2008
|
1,404
|
|
5,221
|
|
6,625
|
Opened
since September 29, 2008
|
6
|
|
32
|
|
38
|
Closed
since September 29, 2008
|
(5)
|
|
(28)
|
|
(33)
|
Net
purchased from (sold by) franchisees since September 29,
2008
|
1
|
|
(1)
|
|
-
|
Restaurant
count at December 28, 2008
|
1,406
|
|
5,224
|
|
6,630
|
|
|
|
|
|
|
Arby’s
restaurant count:
|
|
|
|
|
|
Restaurant
count at December 30, 2007
|
1,106
|
|
2,582
|
|
3,688
|
Opened
in 2008
|
40
|
|
87
|
|
127
|
Closed
in 2008
|
(15)
|
|
(44)
|
|
(59)
|
Net
purchased from (sold by) franchisees in 2008
|
45
|
|
(45)
|
|
-
|
Restaurant
count at December 28, 2008
|
1,176
|
|
2,580
|
|
3,756
|
|
|
|
|
|
|
Total
Wendy’s/Arby’s restaurant count at December
28, 2008
|
2,582
|
|
7,804
|
|
10,386
|
|
|
2008
|
|
|
2007
|
|
Company-owned
average unit volumes:
|
|
(in
millions)
|
|
Wendy’s
– North America
|
|
$ |
1,452.9 |
|
|
$ |
1,436.7 |
|
Arby’s
– North America
|
|
$ |
966.9 |
|
|
$ |
1,016.0 |
|
________________
(a)
|
Wendy’s
data, other than average unit volumes, is only for the period commencing
with the September 29, 2008 merger date through the end of the fiscal
year.
|
2008
Compared with 2007
Sales
Our
sales, which were generated primarily from our Company-owned restaurants,
increased $548.9 million, or 49.3%, to $1,662.3 million for 2008 from $1,113.4
million for 2007. The increase in sales is primarily due to the
Wendy’s Merger which added 1,406 net Company-owned restaurants to the
Wendy’s/Arby’s restaurant system and generated $530.8 million in sales during
the fourth quarter. Excluding Wendy’s, sales increased $18.1 million,
which is attributable to the $80.0 million increase in sales from the 70 net
Arby’s Company-owned restaurants added since December 30, 2007 and substantially
offset by a $62.0 million decrease in sales due to a 5.8% decrease in Arby’s
Company-owned same-store sales. Of the 45 net restaurants acquired
from franchisees, 41 are in the California market (the “California Restaurants”)
and were purchased from a franchisee on January 14, 2008 (the “California
Restaurant Acquisition”). The California Restaurants generated
approximately $36.0 million of sales in 2008. Same store sales of our
Arby’s Company-owned restaurants were primarily impacted by the effect of
deterioration of economic conditions in 2008 which resulted in decreases in
consumers’ discretionary income, reduced consumer confidence in the economy,
continued discounting by our competitors, and high unemployment
levels. As a result of these factors, we have experienced an
escalating decline in customer traffic
and lower
sales volumes. In addition, when compared to the prior year, Arby’s
executed marketing campaigns that were not as effective in reinforcing
consumers’ perception of our value position in the QSR marketplace.
Franchise
Revenues
Total
franchise revenues, which were generated entirely from franchised restaurants,
increased $73.5 million, or 84.4%, to $160.5 million for 2008 from $87.0 million
for 2007. The increase was due to the Wendy’s Merger which added
5,224 franchised restaurants to the Wendy’s/Arby’s restaurant system and
generated $74.6 million in additional franchise revenue during the 2008 fourth
quarter. Excluding Wendy’s, franchise revenues decreased $1.1
million, which is primarily attributable to the effect of the California
Restaurant Acquisition whereby previously franchised restaurants are now
Company-owned and the 3.6% decrease in same-store sales for Arby’s franchised
restaurants. Same-store sales of our franchise restaurants decreased
primarily due to the same negative factors discussed above under “Sales,” but
the use of incremental national media advertising initiatives in the 2008 first
and third quarters had a greater positive effect on franchised restaurants than
Company-owned restaurants due to the increased exposure in many markets in which
our franchisees operate.
Asset
Management and Related Fees
As a
result of the Deerfield Sale on December 21, 2007, there were no asset
management and related fees in 2008.
Restaurant
Margin
Our
restaurant margin decreased to 14.8% for 2008 from 19.7% for 2007. We
define restaurant margin as sales from Company-owned restaurants (excluding
sales from bakery items and kid’s meal promotion items to franchisees) less cost
of sales, divided by sales. In addition to the fourth quarter impact
of lower average restaurant margins of 11.7% generated by Wendy’s, total
restaurant margin was negatively impacted by the decline in Arby’s margin to
16.1% from 19.7% last year, stemming from (1) a decline in Arby's
same-store sales which negatively impacted its operational leverage of fixed and
semi-variable costs as a percentage of sales, (2) higher utilities and fuel
costs under new distribution contracts that became effective in the third
quarter of 2007, (3) increased advertising which was anticipated to generate
additional customer traffic but did not, (4) an increase in labor costs
primarily due to the effect on payroll and related costs from Federal and state
minimum wage increases in 2008 and (5) higher food and paper costs primarily due
to fluctuations in the cost of beef and other commodities.
Cost
of Services
As a
result of the Deerfield Sale, we did not incur any cost of services in
2008. For 2007, our cost of services was from the management of CDOs
and Funds by Deerfield.
General
and Administrative
Our
general and administrative expenses increased $43.3 million, or 21.1%,
principally due to $79.5 million of Wendy’s general and administrative expenses
added during the 2008 fourth quarter as a result of the Wendy’s Merger,
partially offset by $24.8 million of general and administrative
expenses incurred in 2007 at our former asset management
segment. Excluding Wendy’s and the former asset management segment,
general and administrative expenses decreased $11.5 million primarily due to
(1) a $14.0 million decrease in corporate general and administrative
expenses in 2008 as a result of our Corporate Restructuring which commenced in
2007, (2) a $6.9 million decrease in incentive compensation in 2008 as compared
to 2007 and (3) a $2.2 million decrease in relocation costs principally
attributable to additional costs in the prior year related to estimated declines
in market value and increased carrying costs for homes we purchased for resale
from relocated employees. These decreases were partially offset by
(1) a $4.5 million increase in salaries and wages as a result of the increase in
employees at our corporate and regional offices as well as increases in existing
employee salaries, (2) a $3.5 million increase for the full year effect of fees
for professional and strategic services provided to us under a
two-year transition services agreement (the “Services Agreement”) entered into
with the Management Company commencing in June 2007 as part of the Corporate
Restructuring and (3) $2.3 million of professional fees related to Wendy’s
Merger integration activities.
Depreciation
and Amortization
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
(In
Millions)
|
|
Arby’s
restaurants, primarily properties
|
|
$ |
61.2 |
|
|
$ |
56.9 |
|
|
$ |
4.3 |
|
Wendy’s
restaurants, primarily properties
|
|
|
23.8 |
|
|
|
- |
|
|
|
23.8 |
|
Asset
management
|
|
|
- |
|
|
|
4.9 |
|
|
|
(4.9 |
) |
General
corporate, primarily properties
|
|
|
3.3 |
|
|
|
4.4 |
|
|
|
(1.1 |
) |
|
|
$ |
88.3 |
|
|
$ |
66.2 |
|
|
$ |
22.1 |
|
Goodwill
Impairment
Following
the Wendy’s Merger, the Company operates in two business segments consisting of
two restaurant brands: (1) Wendy’s restaurants and (2) Arby’s restaurants. Each
segment includes reporting units for Company-owned restaurants and franchise
operations for purposes of measuring goodwill impairment under Statement of
Financial Accounting Standard (“SFAS”) No. 142 “Goodwill and Other Intangible
Assets” (“SFAS 142”).
The
Company tests the carrying value of goodwill for impairment annually, or more
frequently if events or changes in circumstances indicate that the asset may be
impaired, by comparing the fair value of each reporting unit, using discounted
cash flows or market multiples based on earnings, to determine if there is an
indication that a potential impairment may exist. If we determine that an
impairment may exist, we then measure the amount of the impairment loss as the
excess, if any, of the carrying amount of the goodwill over its implied fair
value. In determining the implied fair value of the reporting unit’s goodwill,
the Company allocates the fair value of a reporting unit to all of the assets
and liabilities of that unit as if the unit had been acquired in a business
combination and the fair value of the reporting unit was the price paid to
acquire the reporting unit. The excess of the fair value of the unit
over the amounts assigned to the assets and liabilities is the implied fair
value of goodwill. If the carrying amount of a reporting unit’s goodwill exceeds
the implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess.
During
the second and third quarters of 2008, we performed interim goodwill impairment
tests at our Arby’s company-owned restaurant and franchise operations reporting
units due to the general economic downturn, a decrease in market valuations, and
decreases in Arby’s same store sales. The results of these interim
tests indicated that the fair values of each of these Arby’s reporting units
exceeded their carrying values.
During
the fourth quarter of 2008, we performed our annual goodwill impairment
test. As a result of the acceleration of the general economic and
market downturn as well as continued decreases in Arby’s same store sales, we
concluded that the carrying amount of the Arby’s Company-owned restaurant
reporting unit exceeded its fair value. Accordingly, we completed
“step two” of our impairment testing as prescribed in SFAS 142 and recorded an
impairment charge of $460.1 million (with a $68.3 million tax benefit related to
the portion of tax deductible goodwill) representing all of the goodwill
recorded for the Arby’s Company-owned restaurant reporting unit. We
also concluded at that time that there was no impairment of goodwill for the
Arby’s franchise reporting unit or any of the Wendy’s reporting
units.
The fair
values of the reporting units were determined by management with the assistance
of an independent third-party valuation firm.
Impairment
of Other Long-Lived Assets
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
(In
Millions)
|
|
Restaurants,
primarily properties at underperforming locations
|
|
$ |
9.6 |
|
|
$ |
2.6 |
|
|
$ |
7.0 |
|
Asset
management
|
|
|
- |
|
|
|
4.5 |
|
|
|
(4.5 |
) |
General
corporate, aircraft
|
|
|
9.6 |
|
|
|
- |
|
|
|
9.6 |
|
|
|
$ |
19.2 |
|
|
$ |
7.1 |
|
|
$ |
12.1 |
|
Facilities
Relocation and Corporate Restructuring
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
(In
Millions)
|
|
Restaurants,
primarily Wendy’s severance costs
|
|
$ |
3.1 |
|
|
$ |
0.6 |
|
|
$ |
2.5 |
|
General
corporate, Corporate Restructuring
|
|
|
0.8 |
|
|
|
84.8 |
|
|
|
(84.0 |
) |
|
|
$ |
3.9 |
|
|
$ |
85.4 |
|
|
$ |
(81.5 |
) |
Gain
on Sale of Consolidated Business
The gain
on sale of consolidated business of $40.2 million in 2007 related to the
Deerfield Sale discussed above under “Introduction and Executive Overview –
Deerfield Sale.”
Interest
Expense
Interest
expense increased $5.7 million, or 9.3%, principally reflecting the Wendy’s
Merger which resulted in $11.4 million in additional interest expense during the
2008 fourth quarter. Excluding Wendy’s, interest expense decreased
$5.7 million principally reflecting a $13.0 million decrease in interest expense
on the senior secured term loan (the “Arby’s Term Loan”) included within the
Arby’s credit agreement (the “Arby’s Credit Agreement”) due to (a) a decrease in
the variable interest rates as compared to the prior year and (b) the decrease
in the Arby’s Term Loan outstanding principal balance as a result of the $143.2
million voluntary net prepayment in 2008 to assure compliance with certain
covenants in the Arby's Credit Agreement. This decrease was partially offset by
(1) a $3.7 million increase related to the change in our interest rate swap
positions, through their expiration in 2008, due to market conditions and (2) a
$3.2 million increase related to an increase in average outstanding debt,
excluding the Arby’s Term Loan.
Gain on
Early Extinguishments of Debt
In 2008,
we reacquired $10.9 million of outstanding Arby’s debt, resulting in a gain on
early extinguishment of approximately $3.6 million.
Investment
Income, Net
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
(In
Millions)
|
|
Net
gains (a):
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities and derivative instruments
|
|
$ |
5.7 |
|
|
$ |
24.7 |
|
|
$ |
(19.0 |
) |
Cost
method investments and limited partnerships
|
|
|
1.6 |
|
|
|
26.7 |
|
|
|
(25.1 |
) |
Interest
income (b)
|
|
|
1.3 |
|
|
|
9.1 |
|
|
|
(7.8 |
) |
Other
|
|
|
0.8 |
|
|
|
1.6 |
|
|
|
(0.8 |
) |
|
|
$ |
9.4 |
|
|
$ |
62.1 |
|
|
$ |
(52.7 |
) |
_______________________________
(a)
|
Our
net gains include realized gains on available-for-sale securities and cost
method investments and unrealized and realized gains on derivative
instruments. Our net recognized gains decreased $44.1 million
and included: (1) $22.4 million decrease in realized gains in 2007 on our
available-for-sale investments primarily reflecting $15.2 million of gains
on two of those investments in 2007 and the reduction in value of our
investments in the deteriorating market, (2) $13.9 million of realized
gains in 2007 on the sale of two of our cost method investments and (3)
$8.4 million of gains realized in 2007 related to the transfer of several
cost method investments from the deferred compensation trusts (the
“Deferred Compensation Trusts”) established for the benefit of
the Former Executives. All of these recognized gains may vary
significantly in future periods depending upon changes in the value of our
investments and the timing of sales of our available-for-sale
securities.
|
|
As
of December 28, 2008, we had unrealized holding gains and (losses) on
available-for-sale marketable securities before income taxes and minority
interests of $0.4 million and ($0.2) million respectively, included in
“Accumulated other comprehensive loss.” We evaluated the
unrealized losses to determine whether these losses were other than
temporary and concluded that they were not. Should either (1)
we decide to sell any of these investments with unrealized losses or (2)
any of the unrealized losses continue such that we believe they have
become other than temporary, we would recognize the losses on the related
investments at that time. All investment
gains and losses may vary significantly in future periods depending upon
changes in the value of our investments and the timing of the sales of our
available-for-sale
investments.
|
(b)
|
Our
interest income decreased $7.8 million principally due to: (1) lower
average outstanding balances of our interest-bearing investments
principally as a result of cash equivalents used in connection with our
Corporate Restructuring, (2) interest income recognized in 2007 at our
former asset management segment and (3) a decrease in interest
rates.
|
Other
Than Temporary Losses on Investments
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
(In
Millions)
|
|
DFR
common stock
|
|
$ |
68.1 |
|
|
$ |
- |
|
|
$ |
68.1 |
|
DFR
Notes
|
|
|
21.2 |
|
|
|
- |
|
|
|
21.2 |
|
Available-for-sale
securities, including CDOs
|
|
|
13.1 |
|
|
|
9.9 |
|
|
|
3.2 |
|
Cost
method investments
|
|
|
10.3 |
|
|
|
- |
|
|
|
10.3 |
|
|
|
$ |
112.7 |
|
|
$ |
9.9 |
|
|
$ |
102.8 |
|
· Losses
due to the reduction in value of our investments
We
account for other than temporary losses under the guidance set forth in SFAS
No. 115, “Accounting for Certain Investments in Debt and Equity Securities”
(“SFAS 115”) and other authoritative guidance, which specify that investments
with unrealized losses should be evaluated for holding losses that are a result
of declines in value, due to market fluctuations or the investee’s business
environment, and are considered not to be recoverable. If we determine that the
holding losses are not recoverable during the anticipated investment holding
period, then the losses are other than temporary.
Based on
a review of our unrealized investment losses in 2008 and 2007, we determined
that the decreases in the fair value of our former investment in the DFR common
stock, certain investments held in the Equities Account and certain cost method
investments were other than temporary due to the severity of the decline, the
financial condition of the investee and the prospect for future recovery in the
market value of the investment. Accordingly, we recorded other than
temporary losses on investments of $68.1 million for DFR common stock as
discussed in “Introduction and Executive Overview – The Deerfield Sale”, $13.1
million for available-for-sale securities and $1.8 million for a cost method
investment, included in “Cost method investments” above, in 2008. We
also recorded other than temporary losses on investments of $9.9 million after a
similar evaluation in 2007.
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.
|
·
|
Losses
due to investment collectability
|
Due to
significant financial weakness in the credit markets, current publicly available
information of DFR, and our ongoing assessment of the likelihood of full
repayment of the principal amount of the DFR Notes, we recorded an allowance for
doubtful collectability of $21.2 million on the DFR Notes. This
charge is included in “Other than temporary losses on investments.”
|
·
|
Losses
due to illiquidity
|
In 2008,
$8.5 million of other than temporary losses on investments included in “Cost
investments” above related to the write-down of our entire cost method
investment in Jurlique International Pty Ltd, a privately-held Australian
upscale skin care company (“Jurlique”). Based on financial results
provided by Jurlique, which noted significant declines in operations in 2008,
its budget for 2009, current economic conditions, illiquidity of the private
company stock, and our internal valuations of Jurlique, we have determined that
our investments in this company will more than likely not be
recoverable.
Benefit
from Income Taxes
Our
effective tax rates for 2008 and 2007 were 17% and 89%,
respectively. Our effective rates are impacted by recurring items,
such as non-deductible expenses relative to pre-tax income (loss), state income
taxes, adjustments related to prior year tax matters and the minority interests
in income of consolidated subsidiaries which are not taxable to us but which are
not deducted from the pre-tax income used to calculate the effective tax rates,
as well as non-recurring, discrete items. Discrete items may occur in
any given year, but are not consistent from year to year. Our U.S.
Federal effective tax rates in both years were principally affected by the
following tax (provision) benefit items: (1) the 2008 tax effect
of ($99.7) million on the impairment of goodwill as described above
in “Goodwill Impairment” as a result of non-deductible financial reporting
goodwill in excess of tax goodwill, (2) the 2008 tax effect of ($20.3) million
on a loss which is not deductible for tax purposes in connection with the
decline in value of our investment in the common stock of DFR and related
declared dividend as described above in “Introduction and Executive Overview –
The Deerfield Sale,” (3) the 2008 tax effect of $9.2 million on the distribution
of foreign earnings net of related foreign tax credits and (4) the 2007 tax
effect of $12.5 million on recognizing a previously unrecognized contingent tax
benefit in connection with the settlement of certain obligations to the Former
Executives.
Minority
Interests in Income of Consolidated Subsidiaries
The
minority interests in income of consolidated subsidiaries decreased $2.4 million
primarily as a result of the effect of the Deerfield Sale.
Income
from Discontinued Operations, Net of Income Taxes
The $2.2 million income
from discontinued operations, net of income taxes, in 2008 primarily relates to
a release of an accrual for state income taxes no longer required after the
settlement of state income tax liabilities in three jurisdictions. The
income from discontinued operations, net of income taxes, of $1.0 million in
2007 consists of a $1.1 million release of an accrual for state income taxes no
longer required after the settlement of a state income tax audit partially
offset by an additional $0.1 million loss relating to the finalization of the
leasing arrangements of two closed restaurants.
Net
(Loss) Income
Our net
results decreased $495.8 million to a net loss of $479.7 million in 2008 from
net income of $16.1 million in 2007. This decrease is primarily due
to the after-tax and applicable minority interest effects of the variances
discussed above, including the goodwill and long-lived assets impairments and
the other than temporary losses recorded during 2008.
2007
Compared to 2006
Presented
below is a table that summarizes our results of operations and compares the
amount of the change between 2007 and 2006 (the “2007
Change”). Certain percentage changes between these years are
considered not measurable or not meaningful (“n/m”).
|
|
|
|
|
|
|
|
2007 Change
|
|
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
Percent
|
|
|
|
(In
Millions)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
1,113.4 |
|
|
$ |
1,073.3 |
|
|
$ |
40.1 |
|
3.7% |
|
Franchise
revenues
|
|
|
87.0 |
|
|
|
82.0 |
|
|
|
5.0 |
|
6.1% |
|
Asset
management and related fees
|
|
|
63.3 |
|
|
|
88.0 |
|
|
|
(24.7 |
) |
(28.1)% |
|
|
|
|
1,263.7 |
|
|
|
1,243.3 |
|
|
|
20.4 |
|
1.6% |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
894.5 |
|
|
|
857.2 |
|
|
|
37.3 |
|
4.4% |
|
Cost
of services
|
|
|
25.2 |
|
|
|
35.3 |
|
|
|
(10.1 |
) |
(28.6)% |
|
General
and administrative
|
|
|
205.4 |
|
|
|
235.8 |
|
|
|
(30.4 |
) |
(12.9)% |
|
Depreciation
and amortization
|
|
|
66.2 |
|
|
|
60.6 |
|
|
|
5.6 |
|
9.2% |
|
Impairment
of other long-lived assets
|
|
|
7.1 |
|
|
|
5.6 |
|
|
|
1.5 |
|
26.8% |
|
Facilities
relocation and corporate restructuring
|
|
|
85.4 |
|
|
|
3.3 |
|
|
|
82.1 |
|
n/m |
|
Gain
on sale of consolidated business
|
|
|
(40.2 |
) |
|
|
- |
|
|
|
(40.2 |
) |
n/m |
|
Other
operating income , net
|
|
|
0.2 |
|
|
|
0.9 |
|
|
|
(0.7 |
) |
(77.8)% |
|
|
|
|
1,243.8 |
|
|
|
1,198.7 |
|
|
|
45.1 |
|
3.8% |
|
Operating
profit
|
|
|
19.9 |
|
|
|
44.6 |
|
|
|
(24.7 |
) |
(55.4)% |
|
Interest
expense
|
|
|
(61.3 |
) |
|
|
(114.1 |
) |
|
|
52.8 |
|
46.3% |
|
Loss
on early extinguishments of debt
|
|
|
- |
|
|
|
(14.1 |
) |
|
|
14.1 |
|
100.0% |
|
Investment
income, net
|
|
|
62.1 |
|
|
|
84.3 |
|
|
|
(22.2 |
) |
(26.3)% |
|
Other
than temporary losses on investments
|
|
|
(9.9 |
) |
|
|
(4.1 |
) |
|
|
(5.8 |
) |
n/m |
|
Other
income (expense), net
|
|
|
(1.4 |
) |
|
|
8.7 |
|
|
|
(10.1 |
) |
n/m |
|
Income
from continuing operations before income taxes and minority
interests
|
|
|
9.4 |
|
|
|
5.3 |
|
|
|
4.1 |
|
77.4% |
|
Benefit
from (provision for) income taxes
|
|
|
8.4 |
|
|
|
(4.6 |
) |
|
|
13.0 |
|
n/m |
|
Minority
interests in income of consolidated subsidiaries
|
|
|
(2.7 |
) |
|
|
(11.5 |
) |
|
|
8.8 |
|
76.5% |
|
Income
(loss) from continuing operations
|
|
|
15.1 |
|
|
|
(10.8 |
) |
|
|
25.9 |
|
n/m |
|
Income
(loss) from discontinued operations, net of income taxes:
|
|
|
1.0 |
|
|
|
(0.1 |
) |
|
|
1.1 |
|
n/m |
|
Net
income (loss)
|
|
$ |
16.1 |
|
|
$ |
(10.9 |
) |
|
$ |
27.0 |
|
n/m |
|
Restaurant
Statistics:
|
Fifteen
Month Method
|
|
Twelve
Month Method
|
Arby’s
same-store sales:
|
2007
|
|
2006
|
|
2007
|
|
2006
|
North
America Company-owned restaurants
|
(1.3)%
|
|
n/a
|
|
(1.5)%
|
|
1.1%
|
North
America Franchised restaurants
|
1.1%
|
|
n/a
|
|
0.9%
|
|
4.5%
|
North
America Systemwide
|
0.3%
|
|
n/a
|
|
0.1%
|
|
3.4%
|
|
|
|
|
|
|
Restaurant
Margin:
|
2007
|
|
2006
|
|
|
Arby’s
|
19.7%
|
|
20.1%
|
|
|
|
|
|
|
|
|
Restaurant
Count:
|
Company-owned
|
|
Franchised
|
|
Systemwide
|
Arby’s
|
|
|
|
|
|
Restaurant
count at December 31, 2006
|
1,061
|
|
2,524
|
|
3,585
|
Opened
in 2007
|
51
|
|
97
|
|
148
|
Closed
in 2007
|
(15)
|
|
(30)
|
|
(45)
|
Net
purchased from (sold by) franchisees in 2007
|
9
|
|
(9)
|
|
-
|
Restaurant
count at December 30, 2007
|
1,106
|
|
2,582
|
|
3,688
|
Sales
Our net
sales, which were generated entirely from our Arby’s Company-owned restaurants,
increased $40.1 million, or 3.7% to $1,113.4 million for 2007 from $1,073.3
million for 2006, due to the $56.3 million increase in net sales from the 45 net
Company-owned restaurants we added during 2007. This increase was
partially offset by a $16.2 million, or 1.3% decrease in Company-owned
same-store sales. Same store sales of our Arby’s Company-owned restaurants
decreased principally due to lower sales volume from a decline in customer
traffic as a result of (1) increased price discounting by other larger QSRs and
(2) price discounting associated with the introduction of a new value program
and (3) a major new product launch that drove less traffic than expected.
These negative factors were partially offset by the effect of selective price
increases that were implemented in late 2006 and during
2007. Same-store sales of our Company-owned restaurants declined
while same-store sales of our Arby’s franchised restaurants grew 1.1% primarily
due to (1) the franchised restaurants implementing certain selective price
increases earlier in 2007 than Company-owned restaurants, and (2) the use
throughout 2007 by franchised restaurants of incremental marketing and print
advertising initiatives which we were already using for the Company-owned
restaurants. These positive impacts on same-store sales of Arby’s
franchised restaurants more than offset declines in traffic.
Franchise
Revenues
Total
franchise revenues, which were generated entirely from the Arby’s franchised
restaurants, increased $5.0 million, or 6.1%, to $87.0 million for 2007 from
$82.0 million for 2006. Excluding $2.2 million of rental income from
properties leased to franchisees being included in franchise revenues in 2007,
Arby’s franchise revenues increased $2.8 million reflecting higher royalties of
(1) $2.5 million from the 58 net increase in Arby’s franchised restaurants and
(2) $0.7 million from a 1.1% increase in Arby’s same-store sales of the Arby’s
franchised restaurants in 2007 as compared with 2006. These increases
in royalties were partially offset by a $0.4 million decrease in Arby’s
franchise and related fees.
Asset
Management and Related Fees
Our asset
management and related fees, which were generated entirely from the management
of CDOs and Funds by Deerfield and which ceased with the Deerfield Sale on
December 21, 2007, decreased $24.7 million, or 28.1%, to $63.3 million for 2007,
through December 21, 2007, from $88.0 million for 2006. This decrease
principally reflects (1) a $16.6 million decrease in incentive fees related to a
certain Fund due to a decline in its performance during 2007, (2) a $7.4 million
net decrease in incentive fees from one CDO principally due to the decrease in
the amount of contingent fees recognized primarily as a result of a call on that
CDO in 2006, (3) a $3.6 million decrease in management fees from DFR as a result
of the decline in value of DFR stock and stock options granted to us as partial
payment of such fees and a decrease in DFR’s net assets on which a portion of
our fees are based and (4) a $2.1 million decrease in incentive fees from DFR as
a result of DFR not meeting certain performance thresholds
during 2007. These decreases were partially offset by (1)
a $4.0 million increase in management fees from existing CDOs and Funds, (2) a
$0.7 million net increase in management fees from the net addition of five CDOs
and one Fund during 2007 and (3) a $0.3 million increase in structuring and
other related fees associated with new CDOs.
Restaurant
Margin
Our
Arby’s restaurant margin decreased slightly to 19.7% in 2007 from 20.1%, in
2006. We define restaurant margin as sales from Company-owned restaurants less
cost of sales, divided by sales. The decrease was primarily related
to (1) price discounting associated with the new value program discussed under
“Sales” above, (2) increases in our cost of beef and other menu items, (3)
higher utility and fuel costs under new distribution contracts that became
effective in the third quarter of 2007 and (4) increased labor costs primarily
due to the effect on payroll and related costs from Federal and state minimum
wage increases implemented in 2007. These negative
factors
were significantly offset by the decrease in beverage costs partially due to the
full year effect of increased rebates earned from a new beverage supplier we
were in the process of converting to during 2006.
Cost
of Services
Our cost
of services, which resulted entirely from the management of CDOs and Funds by
Deerfield, decreased $10.1 million, or 28.6%, to $25.2 million for
2007, through December 21, 2007, from $35.3 million for 2006 principally due to
a net decrease of $10.0 million in incentive compensation primarily for existing
employees reflecting Deerfield’s weaker performance during 2007.
General
and Administrative
Our
general and administrative expenses decreased $30.4 million, or 12.9%,
principally due to (1) a $17.0 million decrease in corporate general and
administrative expenses principally related to (a) the resignation effective in
June 2007 of the Former Executives and certain other officers and employees of
Triarc who became employees of the Management Company and are no longer employed
by us and (b) our sublease to the Management Company of one of the floors of our
New York headquarters, both partially offset by the fees for professional and
strategic services provided to us under a two-year transition Services Agreement
which commenced on June 30, 2007, (2) an $8.1 million decrease in incentive
compensation due to weaker performance at our business segments, (3) a $5.9
million decrease in outside consultant fees at our Arby’s restaurant
segment partially offset by a $2.1 million increase in salaries, which partially
replaced those fees, primarily attributable to the strengthening of the
infrastructure of that segment following the acquisition of RTM Restaurant Group
(“RTM”) prior to 2006 (the “RTM Acquisition”), (4) a $4.0 million reduction of
severance and related charges in connection with the replacement of three senior
restaurant executives during 2006 that did not recur in 2007, (5) a $1.8 million
decrease in recruiting fees at our Arby’s restaurant segment associated with the
strengthening of the infrastructure in 2006 following the RTM Acquisition and
(6) a $1.7 million reduction of training and travel costs at our Arby ‘s
restaurant segment as part of an expense reduction initiative. These
decreases were partially offset by (1) a $2.6 million severance charge in 2007
for one of our asset management executives and (2) a $2.3 million increase in
relocation costs in our Arby’s restaurant segment principally attributable to
additional estimated declines in market value and increased carrying costs
related to homes we purchased for resale from relocated employees.
Depreciation
and Amortization
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(In
Millions)
|
|
Arby’s
restaurants, primarily properties
|
|
$ |
56.9 |
|
|
$ |
50.5 |
|
|
$ |
6.4 |
|
Asset
management
|
|
|
4.9 |
|
|
|
5.8 |
|
|
|
(0.9 |
) |
General
corporate, primarily properties
|
|
|
4.4 |
|
|
|
4.3 |
|
|
|
0.1 |
|
|
|
$ |
66.2 |
|
|
$ |
60.6 |
|
|
$ |
5.6 |
|
Impairment
of Other Long-lived Assets
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(In
Millions)
|
|
Asset
management
|
|
$ |
4.5 |
|
|
$ |
1.6 |
|
|
$ |
2.9 |
|
Restaurants,
primarily properties at underperforming locations
|
|
|
2.6 |
|
|
|
4.0 |
|
|
|
(1.4 |
) |
|
|
$ |
7.1 |
|
|
$ |
5.6 |
|
|
$ |
1.5 |
|
The
impairment of other long-lived assets increased $1.5 million principally
reflecting (1) a $2.9 million asset impairment charge related to an internally
developed financial model that our asset management segment did not use and that
was subsequently sold. In addition there was as $0.4 million increase
in impairment charges related to our TJ Cinnamons brands significantly offset by
a $1.8 million decrease in charges related to underperforming Arby’s
restaurants.
Facilities
Relocation and Corporate Restructuring
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(In
Millions)
|
|
General
corporate
|
|
$ |
84.8 |
|
|
$ |
3.2 |
|
|
$ |
81.6 |
|
Restaurants
|
|
|
0.6 |
|
|
|
0.1 |
|
|
|
0.5 |
|
|
|
$ |
85.4 |
|
|
$ |
3.3 |
|
|
$ |
82.1 |
|
The charge of
$85.4 million in 2007 consisted of general corporate charges of $84.8 million
and a $0.6 million additional charge for employee relocation costs in connection
with combining our then existing restaurant operations with those of RTM
following the RTM Acquisition. The general corporate charges of $84.8
million were principally related to the Corporate Restructuring discussed above
under “Introduction and Executive Overview – Other Items” and consist of (1) the
payment entitlements under the Contractual Settlements of $72.8
million, including the additional $1.6 million total payments
described below, of which $3.5 million is included in “General and
administrative” expenses as incentive compensation, (2) severance for two other
former executives of $12.9 million, excluding incentive compensation that is due
to them for their 2007 period of employment with the Company, both including
applicable employer payroll taxes, (3) severance and consulting fees of $1.8
million with respect to other New York headquarters’ executives and employees
and (4) a loss of approximately $0.8 million on properties and other assets at
our former New York headquarters, principally reflecting assets for which the
fair value was less than the book value, sold during 2007 to the Management
Company. Under the terms of the Contractual Settlements, our Chairman, who is
also our former Chief Executive Officer, was entitled to a payment consisting of
cash and investments which had a fair value of $50.3 million as of July 1, 2007
($47.4 million upon distribution on December 30, 2007) and our Vice Chairman,
who is also our former President and Chief Operating Officer, was entitled to a
payment consisting of cash and investments which had a fair value of $25.1
million as of July 1, 2007 ($23.7 million upon distribution on December 30,
2007), both subject to applicable withholding taxes, during the 2007 fourth
quarter. We had funded the severance payment obligations to the
Former Executives, net of estimated withholding taxes, by the transfer of cash
and investments to rabbi trusts (the “2007 Trusts”), in the second quarter of
2007. The $4.3 million decline in value of the assets in the 2007
Trusts reduced our general corporate charges since it resulted in a
corresponding reduction of the payment obligations under the Contractual
Settlements. Funding the 2007 Trusts net of estimated withholding
taxes provided us with additional operating liquidity, but reduced the amounts
that otherwise would have been held in the 2007 Trusts for the benefit of the
Former Executives. Accordingly, the former Chief Executive Officer and
former President and Chief Operating Officer were paid $1.1 million and $0.5
million, respectively, representing an interest component on the amounts that
otherwise would have been included in the 2007 Trusts. The charges of
$3.3 million in 2006 included $3.2 million of general corporate expense
principally representing a fee related to our decision in 2006 to terminate the
lease of an office facility in Rye Brook, New York rather than continue our
efforts to sublease the facility.
Gain
on Sale of Consolidated Business
The gain on sale of
consolidated business of $40.2 million in 2007 related to the Deerfield
Sale discussed above under “Introduction and Executive Overview – Deerfield
Sale.”
Interest
Expense
Interest
expense decreased $52.8 million, or 46.2%, principally reflecting a $54.2
million decrease in interest expense on debt securities sold with an obligation
to purchase or under agreements to repurchase due to the effective redemption of
our investment in the Opportunities Fund as of September 29, 2006, (the
“Redemption”). We no longer consolidate the Opportunities Fund
subsequent to the Redemption. Accordingly, interest expense and
related net investment income are no longer affected by the significant leverage
associated with the Opportunities Fund.
Loss
on Early Extinguishments of Debt
There
were no early extinguishments of debt in 2007. The loss on early
extinguishments of debt of $14.1 million in 2006 consisted of (1) $13.1 million
which resulted from the conversion or effective conversion of an aggregate
$172.9 million principal amount of our 5% convertible notes due 2023, (the
“Convertible Notes”), into shares of our class A and class B common stock, (the
“Convertible Notes Conversions”), and consisted of $9.0 million of premiums paid
in cash and shares of our class B common stock, the write-off of $4.0 million of
related previously unamortized deferred financing costs and $0.1 million of fees
related to the conversions and (2) a $1.0 million write-off of previously
unamortized deferred financing costs in connection with principal repayments of
the Arby’s Term Loan from excess cash.
Investment
Income, Net
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(In
Millions)
|
|
Net
gains (a):
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities and derivative instruments
|
|
$ |
24.7 |
|
|
$ |
7.0 |
|
|
$ |
17.7 |
|
Cost
method investments and limited partnerships
|
|
|
26.7 |
|
|
|
3.6 |
|
|
|
23.1 |
|
Interest
income (b)
|
|
|
9.1 |
|
|
|
72.5 |
|
|
|
(63.4 |
) |
Other
|
|
|
1.6 |
|
|
|
1.2 |
|
|
|
0.4 |
|
|
|
$ |
62.1 |
|
|
$ |
84.3 |
|
|
$ |
(22.2 |
) |
|
(a)
|
Our
recognized net gains increased $40.8 million and included (1) a $15.2
million realized gain on the sale in 2007 of two of our available-for-sale
securities, (2) $13.9 million of realized gains on the sale in 2007 of two
of our cost method investments,
(3) $8.4 million of gains realized on the transfer of several cost method
investments from two deferred compensation trusts to the Former Executives
in connection with the Contractual Settlements during 2007 and (4) $2.7
million of unrealized gains on
derivatives.
|
|
(b)
|
Our
interest income decreased $63.4 million due to lower average outstanding
balances of our interest-bearing investments principally as a result of
the Redemption whereby our net investment income and interest expense are
no longer affected by the significant leverage associated with the
Opportunities Fund after September 29,
2006.
|
Other
Than Temporary Losses on Investments
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(In
Millions)
|
|
Available-for-sale
securities, including CDOs
|
|
$ |
9.9 |
|
|
$ |
2.0 |
|
|
|
7.9 |
|
Cost
method investments
|
|
|
- |
|
|
|
2.1 |
|
|
|
(2.1 |
) |
|
|
$ |
9.9 |
|
|
$ |
4.1 |
|
|
$ |
5.8 |
|
|
·
|
Losses
due to the reduction in value of our
investments
|
Based on
a review of our unrealized investment losses in 2007 and 2006, we determined
that the decreases in the fair value of certain of our investments were other
than temporary due to the severity of the decline, the financial condition of
the investee and the prospect for future recovery in the market value of the
investment. Accordingly, we recorded other than temporary losses on investments
in 2007 of $9.9 million. We also recorded other than temporary losses
on investments of $4.1 million after a similar evaluation in 2006.
Other
Income (Expense), Net
Other
income (expense), net, decreased $10.1 million in 2007 as compared to 2006,
principally reflecting (1) a $4.0 million decrease in our equity in DFR’s
operations for the respective years, (2) a $2.9 million loss in 2007 on
DFR common shares distributed from the 2007 Trusts, (3) a $1.7 million gain
in 2006 which did not recur in 2007 on the sale of a portion of our investment
in Jurlique., (4) a $0.9 million decrease in equity in earnings of Encore
Capital Group, Inc., a former investee of ours, (“Encore”), which we no longer
accounted for under the Equity Method subsequent to May 10, 2007, the date of
the sale of substantially all of our investment and (5) a $0.5 million increase
in the loss from a foreign currency derivative related to Jurlique which matured
on July 5, 2007. These decreases were partially offset by a $2.1
million decrease in costs recognized related to strategic business alternatives
that were not pursued.
Benefit
from (provision for) Income Taxes
Our
effective tax rate for 2007 and 2006 was 89% and (86%),
respectively. Our effective rates are impacted by recurring items,
such as non-deductible expenses relative to pre-tax income (loss), adjustments
related to prior year tax matters, the minority interests in income of
consolidated subsidiaries which are not taxable to us but which are not deducted
from the pre-tax income used to calculate the effective tax rates and state
income taxes, as well as non-recurring, discrete items. Discrete
items may occur in any given year, but are not consistent from year to
year. Our U.S. Federal effective tax rates in both years were
principally affected by the 2007 tax effect of $12.5 million on recognizing a
previously unrecognized contingent tax benefit in connection with the settlement
of certain obligations to the Former Executives.
Minority
Interests in Income of Consolidated Subsidiaries
Minority
interests in income of consolidated subsidiaries decreased by $8.8 million
principally reflecting a decrease of $9.1 million as a result of lower income of
Deerfield through December 21, 2007, the date of the Deerfield Sale, as compared
with 2006.
Income
(Loss) From Discontinued Operations, Net of Income Taxes
The
income from discontinued operations of $1.0 million in 2007 consists of a $1.1
million release of an accrual for state income taxes no longer required after
the settlement of a state income tax audit partially offset by an additional
$0.1 million loss relating to the finalization of the leasing arrangements of
the two closed restaurants mentioned below. The loss from
discontinued operations of $0.1 million in 2006 consists of a $1.3 million loss
from operations related to our closing two underperforming restaurants,
substantially offset by (1) the release of $0.7 million of reserves for state
income taxes no longer required upon the expiration of a state income tax
statute of limitations and (2) the release of $0.5 million of certain other
accruals as a result of revised estimates to liquidate the remaining
liabilities.
Net
Income (Loss)
Our net
results improved $27.0 million to income of $16.1 million in 2007 from a loss of
$10.9 million in 2006. This increase is a result of the after-tax and
applicable minority interest effects of the variances discussed above, including
the facilities relocation and corporate restructuring charge as offset by the
gain on sale of consolidated business recorded in 2008.
Liquidity
and Capital Resources
Sources
and Uses of Cash for 2008
Cash and cash equivalents (“Cash”)
totaled $90.1 million at December 28, 2008 compared to $78.1 million at December
30, 2007. For the year ended December 28, 2008, net cash provided by
operating activities totaled $72.9 million, primarily from the following
significant items:
|
·
|
Our
net loss of $479.7 million;
|
|
·
|
Arby’s
Company-owned restaurants non-cash goodwill impairment
of $460.1 million;
|
|
·
|
Net
non-cash operating investment adjustments of $105.4 million principally
reflecting our other than temporary losses on investments in our common
stock of DFR and an allowance for doubtful accounts for our DFR Notes
investment. To a lesser extent, there were also other than
temporary losses on investments related to our investments in Jurlique,
certain available-for-sale equity securities and other cost
investments;
|
|
·
|
Depreciation
and amortization of $88.3 million;
|
|
·
|
Impairment
of other long-lived assets charges of $19.2
million;
|
|
·
|
The
write off of deferred costs related to a financing alternative that is no
longer being pursued and amortization of
deferred financing costs which totaled $8.9
million;
|
|
·
|
Our
deferred income tax benefit of $105.3
million;
|
|
·
|
The
recognition of deferred vendor incentives, net of amount received, of $6.5
million and
|
|
·
|
A
decrease in operating assets and liabilities of $26.9 million principally
reflecting a $31.4 million decrease in accounts payable, accrued expenses
and other current liabilities primarily due to (1) the payment of 2007
accrued bonuses in 2008, (2) significantly reduced bonus accruals in 2008
due to weaker performance and (3) severance paid in connection with the
Corporate Restructuring.
|
We expect
positive cash flows from continuing operating activities during
2009.
Additionally,
for the year ended December 28, 2008, we had the following significant sources
and uses of cash other than from operating activities:
|
·
|
Proceeds
of $37.8 million from long-term debt, including $20.0 million from
refinancing one of our corporate aircraft discussed further
below;
|
|
·
|
Net
proceeds of $51.1 million from investments included in investing
activities;
|
|
·
|
Cash
of $199.8 million acquired as part of the Wendy’s
Merger;
|
|
·
|
Repayments
of long-term debt of $177.9 million which includes $143.2 million of
voluntary net principal repayments of our Arby’s Term Loan discussed
further below;
|
|
·
|
Cash
capital expenditures totaling $107.0 million, including the construction
of new restaurants which amounted to approximately $43.7 million and the
remodeling of existing restaurants;
|
|
·
|
Payment
of cash dividends totaling $30.5 million discussed further
below;
|
|
·
|
Capitalized
transaction costs related to the Wendy’s Merger of $18.4 million
and
|
|
·
|
Cash
paid for business acquisitions, other than Wendy’s, totaling $9.6 million,
including $7.9 million for the California Restaurant
Acquisition.
|
The net
cash receipts from cash flows (excluding the effect of foreign currency exchange
rate adjustments and discontinued operations) was approximately $18.0
million.
Working
Capital and Capitalization
Working
capital, which equals current assets less current liabilities, was a deficiency
of $121.7 million at December 28, 2008, reflecting a current ratio, which equals
current assets divided by current liabilities, of 0.8:1. The working
capital deficit at December 28, 2008 increased $84.8 million from a deficit of
$36.9 million at December 30, 2007, primarily due to (1) an increase of $100.0
million from the additional Wendy’s working capital deficit and (2) a decrease
from net cash receipts of approximately $18.0 million as discussed
above.
Our total
capitalization at December 28, 2008 was $3,497.6 million, consisting of
stockholders’ equity of $2,386.0 million and long-term debt of $1,111.6 million,
including current portion. Our total capitalization at December 28,
2008 increased $2,309.4 million from $1,188.2 million at December 30, 2007
principally reflecting:
|
·
|
The
Wendy’s Merger, which increased our total capitalization by $2,991.8
million, consisting of additional stockholder’s equity of $2,494.7 million
and long-term debt of $497.1 million, including current
portion;
|
|
·
|
Cash
dividends paid of $30.5 million and the non-cash stock dividend of the DFR
common shares with a carrying value of $14.5 million discussed
below;
|
|
·
|
Net
loss of $479.7 million, which includes the effect of the goodwill
impairment, and losses on investments;
|
|
·
|
The
components of “Accumulated other comprehensive loss,” that are not
included in the calculation of net loss, of $41.2 million principally
reflecting the currency translation adjustment;
and
|
|
·
|
The $124.9
million net decrease in long-term debt principally due to the $143.2
voluntary net principal prepayments on the Arby’s Term Loan discussed
below.
|
Long-term
Debt
We have
the following obligations outstanding as of December 28, 2008:
|
|
Outstanding
balance at December 28, 2008
|
|
|
2009
Principal Payments
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
Senior
secured term loan (1)
|
|
$ |
385.0 |
|
|
$ |
5.1 |
|
6.20%
Senior Notes (2)
|
|
|
199.1 |
|
|
|
- |
|
6.25%
Senior Notes (3)
|
|
|
188.9 |
|
|
|
- |
|
Sale-leaseback
obligations, excluding interest
|
|
|
123.8 |
|
|
|
3.6 |
|
Capitalized
lease obligations, excluding interest (4)
|
|
|
106.8 |
|
|
|
19.4 |
|
7%
Debentures (5)
|
|
|
79.0 |
|
|
|
- |
|
Secured
bank term loan (6)
|
|
|
19.8 |
|
|
|
0.9 |
|
California
Restaurant Acquisition notes payable (7)
|
|
|
5.3 |
|
|
|
1.2 |
|
Convertible
notes (8)
|
|
|
2.1 |
|
|
|
- |
|
Other
|
|
|
1.8 |
|
|
|
0.2 |
|
|
|
$ |
1,111.6 |
|
|
$ |
30.4 |
|
________________________
(1)
|
As
of December 28, 2008, the Arby’s Credit Agreement included a senior
secured Arby’s Term Loan which is due in July 2012 and a senior secured
revolving credit facility (“the Arby’s Revolver”) of $100.0 million, which
expires in July 2011. During 2008, we borrowed a total of $40.0
million under the Arby’s Revolver; however, no amounts were outstanding at
the end of 2008. The availability under the Arby’s Revolver as of
December 28, 2008 was $92.2 million, which is net of $7.8 million for
outstanding letters of credit. During 2008, we made $143.2 million
of voluntary net principal prepayments on the Arby’s Term Loan to assure
compliance with the maximum lease adjusted leverage ratio in the Arby's
Credit Agreement. The Arby’s Term Loan also required prepayments of
principal amounts resulting from certain events and, on an annual basis,
from excess cash flow of the Arby’s restaurant business as determined
under the Arby’s Credit Agreement (the “Excess Cash Flow Payment”). The
Excess Cash Flow Payment for fiscal 2007 of $10.4 million was paid in the
second quarter of 2008. There will be no Excess Cash Flow Payment
necessary for fiscal 2008. Additionally in 2008, the Company
reacquired outstanding Arby’s Term Loans with an outstanding principal
amount of $10.9 million for $7.2 million, which resulted in a gain on
early extinguishment of debt of approximately $3.7
million.
|
The Arby’s Credit
Agreement was amended and restated as of March 11, 2009 and Wendy’s and
certain of its affiliates in addition to ARG and certain of its affiliates became parties
(see “Item 1A. Risk Factors—Risks Related to Wendy’s and Arby’s
Businesses – Wendy’s and its subsidiaries, and ARG and its subsidiaries, are
subject to various restrictions, and substantially all of their non-real estate
assets are pledged subject to certain restrictions, under a Credit Agreement”).
Wendy’s, Arby’s and certain other subsidiaries are the co-borrowers (the
“Co-Borrowers”) under the amended and restated Credit
Agreement. Under the amended and restated Credit Agreement
substantially all of the assets of the Co-Borrowers (other than real property,
except for mortgages on certain Wendy’s real properties), the stock of Wendy’s
and ARG and their domestic subsidiaries and 65% of the stock of their foreign
subsidiaries (all subject to certain exclusions) are pledged as collateral
security, and the Co-Borrowers’ obligations are also guaranteed by substantially
all of the domestic entities comprising the Wendy’s and Arby’s restaurant
segments (subject to certain limitations). The amended and restated
Credit Agreement also contains covenants that, among other things, require
Wendy’s and ARG and their subsidiaries to maintain certain aggregate maximum
leverage and minimum interest coverage ratios and restrict their ability to
incur debt, pay dividends or make other distributions to Wendy’s/Arby’s, make
certain capital expenditures, enter into certain fundamental transactions
(including sales of assets and certain mergers and consolidations) and create or
permit liens.
The amended and restated
Credit Agreement includes a senior secured term loan facility (the
“Amended Arby’s Term Loan”), which had $384.0 outstanding as of March 11, 2009,
and a senior secured revolving credit facility of $100.0. The
Amended Arby’s Term Loan is due not later than July 2012 and the revolving
credit facility expires in July 2011. The revolving credit facility
includes a subfacility for the issuance of letters of credit up to $50.0
million. As
of March
11,
2009,
$26.2 of loans were outstanding
and letters of credit in the aggregate amount of $35.1 were issued under the
amended and
restated Credit
Agreement. The Amended
Arby’s Term Loan and amounts borrowed under the revolving credit facility bear
interest at the borrowers’ option at either (1) LIBOR of not less than 2.75%
plus 4.0% 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 3.0%. The borrowers are also
charged a facility fee based on the unused portion of the total credit facility
of 0.5% per annum.
(2)
|
Unsecured
debt assumed as part of the Wendy’s Merger and is due June 2014 and
redeemable prior to maturity at our option. The Wendy’s 6.20% senior
notes were adjusted to fair value at the date of and in connection with
the Wendy’s Merger based on an outstanding principal of $224.6 million and
an effective interest rate of 7.0%.
|
(3)
|
Unsecured
debt assumed as part of the Wendy’s Merger and is due November 2011 and is
redeemable prior to maturity at our option. The Wendy’s 6.25% senior
notes were adjusted to fair value at the date of and in connection with
the Wendy’s Merger based on an outstanding principal of $199.7 million and
an effective interest rate of 6.6%.
|
(4)
|
The
capitalized lease obligations, which extend through 2036, include $30.1
million of capital lease obligations assumed as part of the Wendy’s
Merger. The Wendy’s capital lease obligations were adjusted to fair
value at the date of and in connection with the Wendy’s
Merger.
|
(5)
|
Unsecured
debt assumed as part of the Wendy’s Merger and is due in 2025. The
Wendy’s 7% debentures are unsecured and were adjusted to fair value at the
date of and in connection with the Wendy’s Merger based on an outstanding
principal of $97.1 million and an effective interest rate of
8.6%.
|
(6)
|
During
2008 we entered into a new $20.0 million financing facility for one of our
existing Company aircraft (the “Bank Term Loan”). The facility
requires monthly payments, including interest, of approximately $0.2
million through August 2013 with a final balloon payment of approximately
$15.2 million due in September
2013.
|
(7)
|
This
obligation represents notes payable assumed as part of the California
Restaurant Acquisition which are due through
2014.
|
(8)
|
We
have $2.1 million of convertible notes outstanding as of December 28, 2008
which do not have any scheduled principal repayments prior to 2023 and are
convertible into 160,000 shares of our class A common stock as adjusted
due to the dividend of DFR common stock distributed to our stockholders in
April 2008. The convertible notes are redeemable at our option
commencing May 20, 2010 and at the option of the holders on May 15, 2010,
2015 and 2020 or upon the occurrence of a fundamental change, as defined,
relating to us, in each case at a price of 100% of the principal amount of the
convertible notes plus accrued
interest.
|
Other
Revolving Credit Facilities
On
January 14, 2009, Wendy’s executed a new $200.0 million revolving credit
facility (the “Wendy’s Revolver”), borrowings under which were secured by
substantially all of Wendy’s current assets, intangibles, stock of Wendy’s
subsidiaries and a portion of their real and personal property. The
Wendy’s Revolver was terminated effective March 11, 2009, in connection with the
execution of the amended and restated Credit Agreement described
above.
AFA
Service Corporation (“AFA”), an independently controlled advertising cooperative
in which we have voting interests of less than 50%, has a $3.5 million line of
credit. The availability under the AFA line of credit as of December 28,
2008 was $3.0 million.
WNAP is
an advertising fund established to collect and administer funds for use in
advertising and promotional programs for Wendy’s company-owned and franchised
stores. The fund has a fully available $25.0 million line of credit
at December 28, 2008. Wendy’s is not the guarantor of the debt.
The line of credit was established to fund these advertising
operations.
One of Wendy’s Canadian
subsidiaries has a fully
available revolving credit facility of Canadian $6.0 million as of December 28,
2008.
Credit
Ratings
The
Company’s corporate family and its senior debt are rated by Standard &
Poor’s (“S&P”) and Moody’s Investors Service (“Moody’s).
On March
2, 2009, S&P lowered its rating on the prior Arby’s Credit Agreement to B
and its corporate family rating on Arby’s to B-. At the same time,
S&P placed the rating on CreditWatch – Developing. S&P is in
the process of reviewing the amended and restated Credit
Agreement. New corporate family and senior secured ratings are
expected following the completion of the review.
On March
3, 2009, Moody’s affirmed (i) a B1 rating for the prior Arby’s Credit Agreement,
(ii) a B2 corporate family rating for Arby’s and (iii) a negative outlook for
Arby’s. Moody’s is in the process of reviewing the amended and
restated Credit Agreement. New corporate family and senior secured
ratings are expected following the completion of the review.
The
Wendy’s 6.20% and 6.25% Senior Notes and 7% Debentures are rated as B+ by
S&P and B2 by Moody’s.
There are
many factors that could lead to future upgrades or downgrades of our credit
ratings. If our credit ratings are upgraded or downgraded, it
could lead to, among other things, changes in borrowing costs and of access to
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.
Treasury
Stock Purchases
Our
management was authorized, to the extent market conditions warranted and as
legally permissible, to repurchase through December 28, 2008 up to a total of
$50.0 million of our class A common stock. Under this program, we did
not make any treasury stock purchases during 2008, and we have not renewed this
program for 2009.
Purchase
of Indebtedness
Subject
to market conditions, our capital needs and other factors, we may from time to
time repurchase our indebtedness and/or the indebtedness of our subsidiaries,
including indebtedness outstanding under the ARG Credit Agreement, in open
market or privately negotiated transactions. During 2008, we
repurchased $10.9 million principal amount of our subsidiaries’ indebtedness, as
discussed above under “Long-term Debt.”
Sources
and Uses of Cash for 2009
Our
anticipated consolidated cash requirements for continuing operations for 2009,
exclusive of operating cash flow requirements, consist principally
of:
|
·
|
Cash
capital expenditures of approximately $140.0 million as discussed below in
“Capital Expenditures”;
|
|
·
|
Quarterly
cash dividends aggregating up to approximately $28.0 million as discussed
below in “Dividends”;
|
|
·
|
Scheduled
debt principal repayments aggregating $30.4
million;
|
|
·
|
Severance
payments of approximately $11.2 million related to our previously
announced Wendy’s merger integration programs and our facilities
relocation and corporate restructuring accruals;
and
|
|
·
|
Restricted
cash of $47.0 million released from the Equities Account to Wendy’s/Arby’s
in 2008; and
|
|
·
|
The
costs of any potential business
acquisitions.
|
We expect
to meet these requirements from operating cash flows. In the event
operating cash flows are not sufficient, the availability under the amended and
restated Credit Agreement is anticipated to provide sufficient liquidity to meet
cash flow requirements.
In
addition, the $47.0 million released from the Equities Account to Wendy’s/Arby’s
in 2008 is required to be returned to the Equities Account in January
2010.
The
availability under the amended and restated Credit Agreement is anticipated to
provide sufficient liquidity, if needed, to meet operating cash
requirements.
Debt
Covenants
The
amended and restated Credit Agreement also contains financial covenants that,
among other things, require Wendy’s and ARG and their subsidiaries to maintain
certain aggregate maximum leverage and minimum interest coverage ratios and
restrict their ability to incur debt, pay dividends or make other distributions
to Wendy’s/Arby’s, make certain capital expenditures, enter into certain
fundamental transactions (including sales of assets and certain mergers and
consolidations) and create or permit liens. As of December 28, 2008,
under the terms of the prior Arby’s Credit Agreement, there was no availability
for the payment of dividends to Wendy's/Arby's. We were in compliance
with all applicable covenants as of December 28, 2008 and project that we will
be in compliance with our covenants throughout 2009. Under the
amended and restated Credit Agreement we have $15.0 million immediately
available for the payment of dividends to Wendy's/Arby's, subject to adjustments
beginning in the 2009 second quarter.
Wendy’s
6.20% and 6.25% Senior Notes and 7% Debentures contain covenants that specify
limits on the incurrence of indebtedness. We were in compliance with
these covenants as of December 28, 2008 and project that we will be in
compliance with our covenants throughout 2009.
A
significant number of the underlying leases in the Arby’s restaurants segment
for the Sale-Leaseback Obligations and the Capitalized Lease Obligations, as
well as operating leases, require or required periodic financial reporting of
certain subsidiary entities within ARG or of individual restaurants, which in
many cases has 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 December 28, 2008, 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
consolidated financial position or results of operations.
Contractual
Obligations
The
following table summarizes the expected payments under our outstanding
contractual obligations at December 28, 2008:
|
|
Fiscal
Years
|
|
|
|
2009
|
|
|
|
2010-2011
|
|
|
|
2012-2013
|
|
|
After
2013
|
|
|
Total
|
|
|
|
(in
millions)
|
|
Long-term
debt (a)
|
|
$ |
7.4 |
|
|
$ |
390.8 |
|
|
$ |
201.8 |
|
|
$ |
281.0 |
|
|
$ |
881.0 |
|
Sale-leaseback
obligations (b)
|
|
|
3.6 |
|
|
|
7.6 |
|
|
|
12.8 |
|
|
|
99.8 |
|
|
|
123.8 |
|
Capitalized
lease obligations (b)
|
|
|
19.4 |
|
|
|
17.1 |
|
|
|
7.8 |
|
|
|
62.5 |
|
|
|
106.8 |
|
Operating
leases (c)
|
|
|
148.7 |
|
|
|
264.0 |
|
|
|
226.0 |
|
|
|
1,199.3 |
|
|
|
1,838.0 |
|
Purchase
obligations (d)
|
|
|
338.2 |
|
|
|
86.6 |
|
|
|
72.5 |
|
|
|
98.1 |
|
|
|
595.4 |
|
Severance
obligations (e)
|
|
|
11.2 |
|
|
|
2.7 |
|
|
|
0.1 |
|
|
|
- |
|
|
|
14.0 |
|
Total
(f)
|
|
$ |
528.5 |
|
|
$ |
768.8 |
|
|
$ |
521.0 |
|
|
$ |
1,740.7 |
|
|
$ |
3,559.0 |
|
(a)
|
Excludes
sale-leaseback and capitalized lease obligations, which are shown
separately in the table, and
interest.
|
(b)
|
Excludes
interest; also excludes related sublease rental receipts of $9.8 million
on sale-leaseback obligations and $5.1 million on capitalized lease
obligations.
|
(c)
|
Represents
the present value of minimum lease cash payments. Excludes
related sublease rental receipts of $136.6
million.
|
(d)
|
Includes
(1) $266.3 million remaining obligation for beverage purchase commitments
with Coca-Cola, Inc. for Wendy’s restaurants and PepsiCo, Inc. for Arby’s
restaurants (2) $139.1 million for food purchase commitments, (3)
$134.1 million for advertising commitments, (4) $18.6 million for capital
expenditures and (5) $37.3 million of other purchase
obligations.
|
(e)
|
Represents
severance for Wendy’s and Wendy's/Arby’s personnel in connection with the
Wendy’s Merger and New York headquarters’
employees.
|
(f)
|
Excludes
Financial Accounting Standards Board (“FASB”) Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes,” (“FIN 48”), obligations of
$30.3 million. We are unable to predict when, and if, payment
of any of this accrual will be
required.
|
Guarantees
and Other Contingencies
|
|
As
of December 28, 2008
|
|
|
|
(in
millions)
|
|
Guaranteed
debt of a subsidiary (1)
|
|
$ |
138.0 |
|
Lease
guarantees and contingent rent on leases(2)
|
|
|
161.9 |
|
Loan
guarantees (3)
|
|
|
19.1 |
|
Letters
of credit (4)
|
|
|
26.4 |
|
____________________
(1)
|
Our
wholly-owned subsidiary, National Propane Corporation (“National
Propane”), retains a less than 1% special limited partner interest in our
former propane business, now known as AmeriGas Eagle Propane, L.P.,
(“AmeriGas Eagle”). National Propane agreed that while it
remains a special limited partner of AmeriGas Eagle, National Propane
would indemnify the owner of AmeriGas Eagle for any payments the owner
makes related to the owner’s obligations under certain of its debt of
AmeriGas Eagle, aggregating approximately $138.0 million as of December
28, 2008, if Amerigas is unable to repay or refinance such debt, but only
after recourse by the owner to the assets of AmeriGas
Eagle. National Propane’s principal asset is
an intercompany note receivable from Wendy’s/Arby’s in the amount of $50.0
million as of December 28, 2008. We believe it is unlikely that
we will be called upon to make any payments under this
indemnity. Prior to 2006, AmeriGas Propane, L.P., (“AmeriGas
Propane”), purchased all of the interests in AmeriGas Eagle other than
National Propane’s special limited partner interest. Either
National Propane or AmeriGas Propane may require AmeriGas Eagle to
repurchase the special limited partner interest. However, we
believe it is unlikely that either party would require repurchase prior to
2009 as either AmeriGas Propane would owe us tax indemnification payments
if AmeriGas Propane required the repurchase or we would accelerate payment
of deferred taxes of $34.7 million as of December 28, 2008, associated
with our sale of the propane business if National Propane required the
repurchase. As of December 28, 2008, we have net operating loss
tax carryforwards sufficient to substantially offset these deferred
taxes.
|
(2)
|
As
of December 28, 2008, RTM, a subsidiary of Wendy’s/Arby’s, guarantees the
lease obligations of 10 restaurants operated by former affiliates of RTM
(the “Affiliate Lease Guarantees”). The RTM selling
stockholders have indemnified us with respect to the Affiliate Lease
Guarantees. In addition, RTM remains contingently liable for 15
leases for restaurants sold by RTM prior to our acquisition of RTM in 2005
(the “RTM Acquisition”) if the respective purchasers do not make the
required lease payments (collectively with the Affiliate Lease Guarantees,
the “Lease Guarantees”). These Lease Guarantees, which extend
through 2025, including all existing extension or renewal option periods
could aggregate a maximum of approximately $16.4 million as of December
28, 2008, assuming all scheduled lease payments have been made by the
respective tenants through December 28, 2008. In
addition, Wendy’s has guaranteed certain leases primarily related to
restaurant locations operated by its franchisees. These leases,
which extend through 2022, including all existing extension or renewal
option periods, could aggregate a maximum $38.0 million, assuming all
scheduled lease payments have been made by respective tenants through
December 28, 2008. Wendy’s is also contingently liable for
certain other leases which have been assigned to unrelated third parties,
who have indemnified Wendy’s against future liabilities arising under the
leases of $107.5 million. These leases expire on various dates, which
extend through 2022, including all existing extension or renewal option
periods.
|
(3)
|
Wendy’s
provided loan guarantees to various lenders on behalf of franchisees under
debt arrangements for new store development and equipment
financing. Recourse on the majority of these loans is limited,
generally to a percentage of the original loan amount or the current loan
balance on individual franchisee loans or an aggregate minimum for the
entire loan arrangement. Wendy’s potential recourse for the
aggregate amount of these loans amounted to $19.1 million as of December
28, 2008.
|
(4)
|
Wendy’s
and Arby’s have outstanding letters of credit of $18.6 million and $7.8
million, respectively, with various parties; however, our management does
not expect any material loss to result from these letters of credit
because we do not believe performance will be
required.
|
Capital
Expenditures
In 2008,
cash capital expenditures amounted to $107.0 million and non-cash capital
expenditures consisting of capitalized leases and certain sale-leaseback
obligations, (“Non-Cash Capital Expenditures”), amounted to $8.4
million. In 2009, we expect that all capital expenditures will be
paid in cash and will amount to approximately $140.0 million, principally
relating to (1) the opening of an estimated 5 new Arby’s Company-owned and 10
new Wendy’s Company-owned restaurants, (2) remodeling some of our Arby’s and
Wendy’s existing Company-owned restaurants and (3) ongoing maintenance capital
expenditures for our Company-owned restaurants. We have $18.6 million
of outstanding commitments for capital expenditures as of December 28, 2008, of
which we expect $12.8 million to be paid in 2009.
Dividends
During
2008, we paid cash dividends of $0.26 per share on our Class A common stock,
aggregating $30.5 million, including our fourth quarter 2008 payment of $7.0
million. We currently intend to continue to declare and pay quarterly
cash dividends; however, there can be no assurance that any quarterly dividends
will be declared or paid in the future or of the amount or timing of such
dividends, if any. During the 2009 first quarter, we declared
dividends of $0.015 per share to be paid on March 30, 2009 to shareholders of
record as of March 20, 2009. If we pay regular quarterly cash
dividends for the remainder of 2009 at the same rate as declared in our 2009
first quarter, our total cash requirement for dividends for all of 2009 would be
approximately $28.0 million based on the number of shares of our Class A common
stock outstanding at February 27, 2009.
Income
Taxes
The
Wendy’s Merger qualified as a reorganization under Section 368(a)(2)(E) of the Internal Revenue Code
of 1986, as amended (the “Code”). Based on the merger
exchange ratio, the former shareholders of Wendy’s own approximately 80% of the
total stock of Wendy’s/Arby’s outstanding immediately after the Wendy’s
Merger. Therefore, the Wendy’s Merger was treated as a reverse acquisition
for U.S. Federal income tax purposes. As a result of the reverse acquisition,
Wendy’s/Arby’s and its subsidiaries became part of the Wendy’s consolidated
group with Wendy’s/Arby’s as its new parent. In addition,
Wendy’s/Arby’s had a short taxable year in 2008 ending on the date of the
Wendy’s Merger. Also as a result of the Wendy’s Merger, there was an
ownership change at Wendy’s/Arby’s as defined in Section 382 of the
Code which places a limit, as defined in the Code, on the amount of a Company’s
net operating losses that can be deducted for tax purposes once there has been
an ownership change.
The
Internal Revenue Service (the “IRS”) is currently conducting an examination of
our U.S. Federal income tax return for the tax period ended December 28, 2008 as
part of the Compliance Assurance Program (“CAP”). Our December 28,
2008 U.S. Federal income tax return includes Wendy’s for all of 2008 and
Wendy’s/Arby’s for the period September 30, 2008 to December 28, 2008. Prior to
the Wendy’s Merger, Wendy’s participated 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. The 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 ending January 1, 2006 to September
29, 2008 are not currently under examination by the IRS. However,
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 $11.3 million. We dispute these notices
and believe ultimate resolution will not have a material adverse impact on our
consolidated financial position or results of operations.
Universal
Shelf Registration Statement
In
December 2008, the Company filed a universal shelf registration statement with
the Securities and Exchange Commission in connection with the possible future
offer and sale, from time to time, an indeterminate amount of our common stock,
preferred stock, debt securities and warrants to purchase any of these types of
securities. This registration statement became effective
automatically upon filing. Unless otherwise described in the
applicable prospectus supplement relating to any offered securities, we
anticipate using the net proceeds of each offering for general corporate
purposes, including financing of acquisitions and capital expenditures,
additions to working capital and repayment of existing debt. We have
not presently made any decision to issue any specific securities under this
universal shelf registration statement.
Legal
and Environmental Matters
In 2001,
a vacant property owned by Adams Packing Association, Inc. (“Adams”), an
inactive subsidiary of the Company, was listed by the United States
Environmental Protection Agency on the Comprehensive Environmental Response,
Compensation and Liability Information System (“CERCLIS”) list of known or
suspected contaminated sites. The CERCLIS listing appears to have
been based on an allegation that a former tenant of Adams conducted drum
recycling operations at the site from some time prior to 1971 until the late
1970s. The business operations of Adams were sold in December
1992. In February 2003, Adams and the Florida Department of
Environmental Protection (the “FDEP”) agreed to a consent order that provided
for development of a work plan for further investigation of the site and limited
remediation of the identified contamination. In May 2003, the FDEP
approved the work plan submitted by Adams’ environmental consultant and during
2004 the work under that plan was completed. Adams submitted its
contamination assessment report to the FDEP in March 2004. In August
2004, the FDEP agreed to a monitoring plan consisting of two sampling events
which occurred in January and June 2005 and the results were submitted to the
FDEP for its review. In November 2005, Adams received a letter from
the FDEP identifying certain open issues with respect to the
property. The letter did not specify whether any further actions are
required to be taken by Adams. Adams sought clarification from the
FDEP in order to attempt to resolve this matter. On May 1, 2007, the
FDEP sent a letter clarifying their prior correspondence and reiterated the open
issues identified in their November 2005 letter. In addition, the
FDEP offered Adams the option of voluntarily taking part in a recently adopted
state program that could lessen site clean up standards, should such a clean up
be required after a mandatory further study and site assessment
report. With our consultants and
outside counsel, we reviewed this option and sent our response and proposed work
plan to FDEP on April 24, 2008 and have commenced additional testing as
suggested by the FDEP and pursuant to the work plan submitted. Once
testing is completed Adams will provide an amended response to
FDEP. Nonetheless, based on amounts spent prior to 2007 of
approximately $1.7 million for all of these costs and after taking into
consideration various legal defenses available to us, including Adams, we expect
that the final resolution of this matter will not have a material effect on our
financial position or results of operations.
On April
25, 2008, a putative class action complaint was filed by Ethel Guiseppone, on
behalf of herself and others similarly situated, against Wendy’s, its directors,
the Company and Trian Partners, in the Franklin County, Ohio Court of Common
Pleas. A motion for leave to file an amended complaint was filed on June 19,
2008. The proposed amended complaint alleged 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 on April 23, 2008, and failure to disclose
material information related to the merger in Amendment No. 3 to the Form S-4
under the Securities Act of 1933 (the “Form S-4”). The proposed amended
complaint sought certification of the proceeding as a class action; preliminary
and permanent injunctions against disenfranchising the purported class and
consummating the merger; a declaration that the defendants breached their
fiduciary duties; costs and attorneys fees; and any other relief the court deems
proper and just.
Also on
April 25, 2008, a putative class action and derivative complaint was filed by
Cindy Henzel, on behalf of herself and others similarly situated, and
derivatively on behalf of Wendy’s, against Wendy’s and its directors in the
Franklin County, Ohio Court of Common Pleas. A motion for leave to file an
amended complaint was filed on June 16, 2008. The proposed amended complaint
alleges 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 on April 23, 2008, and failure to disclose material information
related to the merger in the Form S-4. The proposed amended complaint seeks
certification of the proceeding as a derivative and class action; an injunction
against consummating the merger and requiring the defendants to promptly hold an
annual meeting and to seek another merger partner; rescission of any part of the
merger agreement already implemented; a declaration that the defendants breached
their fiduciary duties; costs and attorneys fees; and any other relief the court
deems proper and just.
On May
22, 2008, a putative class action complaint was filed by Ronald Donald Smith, on
behalf of himself and others similarly situated, against Wendy’s and its
directors in the Franklin County, Ohio Court of Common Pleas. A motion for leave
to file an amended complaint was filed on June 30, 2008. The proposed amended
complaint alleged 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 on April 23, 2008, and failure to disclose material information
related to the merger in the Form S-4. The proposed amended complaint sought
certification of the proceeding as a derivative and class action; an injunction
against consummating the merger and requiring the defendants to promptly hold an
annual meeting and to seek another merger partner; rescission of any part of the
merger agreement already implemented; a declaration that the defendants breached
their fiduciary duties; costs and attorneys fees; and any other relief the court
deems proper and just.
On June
13, 2008, a putative class action complaint was filed by Peter D. Ravanis and
Dorothea Ravanis, on behalf of themselves and others similarly situated, against
Wendy’s, its directors, and Triarc Companies, Inc. in the Supreme Court of the
State of New York, New York County. An amended complaint was filed on June 20,
2008. The amended complaint alleges 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 on April 23, 2008, and failure to disclose
material information related to the merger in the Form S-4. The amended
complaint seeks certification of the proceeding as a class action; preliminary
and permanent injunctions against consummating the merger; other equitable
relief; attorneys’ fees; and any other relief the court deems proper and just.
All parties to this case have jointly requested that the court stay the action
pending resolution of the Ohio cases.
On July
9, 2008, the parties to the three Ohio actions described above filed a
stipulation and proposed order that would consolidate the cases, provide for the
proposed amended complaint in the Henzel case to be the operative complaint in
each of the cases, designate one law firm as lead plaintiffs’ counsel, and
establish an answer date for the defendants in the consolidated case. The court
entered the order as proposed in all three cases on July 9, 2008.
On August
13, 2008, counsel for the parties to the Guiseppone, Henzel, Smith and Ravanis
cases described above entered into a memorandum of understanding in which they
agreed upon the terms of a settlement of all such lawsuits, which would include
the dismissal with prejudice, and release, of all claims against all the
defendants, including Wendy’s, its directors, us and Trian Partners. In
connection with the settlement, Wendy’s agreed to make certain additional
disclosures to its shareholders, which were contained in the Form S-4 and to pay
plaintiffs’ legal fees.
On
January 30, 2009, the parties entered into a Class and Derivative Action
Stipulation of Settlement. The settlement is subject to approval by
the Common Pleas Court of Franklin County, Ohio. On January 30, 2009,
the plaintiffs submitted an application for an order preliminarily approving the
settlement, certifying a class for settlement purposes only, providing for
notice to the class and setting a final settlement hearing. The court
has not yet ruled on that application. Although we expect the court
to approve the settlement, there can be no assurance that the court will do
so. If the court withholds approval, the proposed settlement may be
terminated.
The
defendants believe that the Guiseppone, Henzel, Smith and Ravanis cases
described above are without merit and intend to vigorously defend them in the
event that court approval is not obtained. While we do not believe that these
actions will have a material adverse effect on our financial condition or
results of operations, unfavorable rulings could occur. Were an unfavorable
ruling to occur, there exists the possibility of a material adverse impact on
our results of operations for the period in which the ruling occurs or for
future periods.
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 $6.9 million
as of December 28, 2008. 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.
Application
of Critical Accounting Policies
The
preparation of our consolidated financial statements in conformity with GAAP
requires us to make estimates and assumptions in applying our critical
accounting policies that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amount of revenues and
expenses during the reporting period. Our estimates and assumptions
concern, among other things, goodwill impairment, impairment of long-lived
assets, other than temporary losses on investments, losses due to investment
collectability, valuations of some of our investments, uncertainties for tax,
legal and environmental matters, and accounting for leases. We
evaluate those estimates and assumptions on an ongoing basis based on historical
experience and on various other factors which we believe are reasonable under
the circumstances.
We
believe that the following represent our more critical estimates and assumptions
used in the preparation of our consolidated financial statements:
Following
the Wendy’s Merger, the Company operates in two business segments consisting of
two restaurant brands: (1) Wendy’s restaurant operations and (2) Arby’s
restaurant operations. Each segment includes Company-owned restaurants and
franchise reporting units which are considered to be separate reporting units
for purposes of measuring goodwill impairment under SFAS 142. As of
December 28, 2008, Wendy’s goodwill of $836.2 million relates entirely to the
Wendy’s franchise reporting unit. Also, Arby’s goodwill of $17.6
million relates entirely to the Arby’s franchise operations.
We test
goodwill for impairment annually, or more frequently if events or changes in
circumstances indicate that the asset may be impaired, by comparing the fair
value of each reporting unit, using discounted cash flows or market multiples
based
on
earnings, to the carrying value to determine if there is an indication that a
potential impairment may exist. If we determine that an impairment may exist, we
then measure the amount of the impairment loss as the excess, if any, of the
carrying amount of the goodwill over its implied fair value. In determining the
implied fair value of the reporting unit’s goodwill, the Company allocates the
fair value of a reporting unit to all of the assets and liabilities of that unit
as if the unit had been acquired in a business combination and the fair value of
the reporting unit was the price paid to acquire the reporting
unit. The excess of the fair value of the unit over the amounts
assigned to the assets and liabilities is the implied fair value of goodwill. If
the carrying amount of a reporting unit’s goodwill exceeds the implied fair
value of that goodwill, an impairment loss shall be recognized in an amount
equal to that excess. The recoverability of the goodwill for the
reporting periods was determined by management, with the assistance of an
independent third-party valuation firm, and based on estimates we made regarding
the present value of the anticipated cash flows associated with each reporting
unit. Those estimates are subject to change as a result of many
factors including, among others, any changes in our business plans, changing
economic conditions and the competitive environment. Should actual
cash flows and our future estimates vary adversely from those estimates we used,
we may be required to recognize additional goodwill impairment charges in future
years. Further, the fair value of the reporting unit can be
determined under several different methods, of which discounted cash flows is
one alternative. Had we utilized an alternative method, the amount of
any potential goodwill impairment charge might have differed significantly from
the amounts as determined.
During
the second and third quarters of 2008, we performed interim goodwill impairment
tests at our Arby’s company-owned restaurant and franchise operations reporting
units due to the general economic downturn, a decrease in market valuations, and
decreases in Arby’s same store sales. The results of these interim
tests indicated that the fair values of each of these Arby’s reporting units
exceeded their carrying values.
During
the fourth quarter of 2008, we performed our annual goodwill impairment
test. As a result of the acceleration of the general economic and
market downturn as well as continued decreases in Arby’s same store sales, we
concluded that the carrying amount of the Arby’s Company-owned restaurant
reporting unit exceeded its fair value. Accordingly, we completed
“step two” of our impairment testing as prescribed in SFAS 142 and recorded an
impairment charge of $460.1 million (with a $68.3 million tax benefit related to
the portion of tax deductible goodwill) representing all of the goodwill
recorded for the Arby’s Company-owned restaurant reporting unit. We
also concluded at that time that there was no impairment of goodwill for the
Arby’s franchise reporting unit or any of the Wendy’s reporting
units.
The fair
value of the Wendy’s franchise reporting unit approximated its carrying value at
September 29, 2008. Should current economic trends deteriorate or
should we experience adverse changes in the Wendy’s business, we could be
required to record impairment charges related to Wendy’s goodwill.
The fair
values of the reporting units were determined by management with the assistance
of an independent third-party valuation firm.
|
·
|
Provisions
for impairment of long-lived
assets:
|
Long-lived
assets include our Wendy’s and Arby’s Company-owned restaurants assets and their
intangible assets, which include trademarks, franchise agreements, favorable
leases and reacquired rights under franchise agreements.
As of
December 28, 2008, the net carrying value of Wendy’s restaurant segment
long-lived assets and intangible assets were $1,259.2 million and $1,365.2
million, respectively and Arby’s restaurant segment long-lived assets and
intangible assets were $495.8 million and $46.2 million,
respectively.
We review
long-lived tangible and amortizing intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If that review
indicates such assets may not be recoverable based upon forecasted undiscounted
cash flows, an impairment loss is recognized for the excess of the carrying
amount over the fair value of the asset. The fair value is generally
estimated to be the present value of the associated cash
flows. Non-amortizing intangible assets are tested for impairment
annually by comparing their carrying value to fair value; any excess of carrying
value over fair value would represent impairment and a corresponding charge
would be recorded. Our critical estimates in this review process
include the anticipated future cash flows of each of Arby’s and Wendy’s
Company-owned restaurants used in assessing the recoverability of their
respective long-lived assets.
Arby’s
restaurants impairment losses reflect impairment charges resulting from the
deterioration in operating performance of certain Company-owned restaurants in
2008, 2007, and 2006. In addition, we recognized impairment losses
for the TJ Cinnamons brand (“TJ Cinnamons”) and asset management contracts in
2008, 2007 and 2006. The fair
values of the impaired assets were estimated to be the present value of the
anticipated cash flows associated with each affected Arby’s Company-owned
restaurant, the TJ Cinnamons trademark and the asset management
contracts. Those estimates are or were subject to change as a result
of many factors including, among others, any changes in our business plans,
changing economic conditions and the competitive environment. Should
actual cash flows and our future estimates vary adversely from those estimates
we used, we may be required to recognize additional impairment charges in future
years. Further, the fair value of the long-lived assets can be
determined under several different methods, of which discounted cash flows is
one alternative. Had we utilized an alternative method, the amounts
of the respective impairment charges might have differed significantly from the
charges reported.
We are in
the process of disposing of one of our Company-owned aircraft. As a
result, we have recorded a general corporate impairment charge to reflect its
fair value as a result of an appraisal related to the potential
sale.
Our
Company-owned restaurants, corporate assets, and other long-lived assets could
require testing for impairment should future events or changes in circumstances
indicate that they may not be recoverable. We no longer have any
asset management contracts as a result of the Deerfield sale.
|
·
|
Unrealized
losses on certain investments deemed to be other than
temporary:
|
We
account for other than temporary losses under the guidance set forth in SFAS
No. 115 and other authoritative guidance, which specify that investments
with unrealized losses should be evaluated for holding losses that are a result
of declines in value, due to market fluctuations or the investee’s business
environment and are considered not to be recoverable. If we determine that the
holding losses are not recoverable during the anticipated investment holding
period, then the losses are other than temporary.
We
performed a review of our unrealized investment losses in 2008, 2007 and 2006
considering the severity and duration of the decline in value and the expected
holding period of the investments. Based on this review, we
determined that the decreases in 2008 related to the fair value of our
investment in the DFR common stock, certain investments held in the Equities
Account and certain cost method investments were other than temporary due to
their severity, duration and our determination that we are unable to determine
whether the value of the investments will be recovered. Therefore,
we have permanently reduced
the cost basis component of those
investments by $112.7 million as of December
28, 2008 (which includes $68.1 million related to the DFR common stock that was
distributed to shareholders in April 2008 and $21.2 million related to the DFR
Notes discussed below). Based on our review in 2007 and 2006,
we also determined that decreases in 2007 and 2006 related to certain
investments held in the Equities account and certain cost investments were other
than temporary due to their severity, duration and our determination that we
were unable to determine whether the value of the investments would be
recovered. Therefore, we permanently reduced the cost basis component
of those investments in 2007 and 2006 by $9.9 million and $4.1 million,
respectively. Recoveries in the value of
investments, if any, will not be recognized in income until the investments are
sold.
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. As of
December 28, 2008, we have aggregate unrealized holding gains and losses
on our available-for-sale marketable securities of $0.4 million and ($0.2)
million, respectively. The Equities Account,
including restricted cash equivalents and equity derivatives, had a fair value
of $37.7 million as of December 28, 2008. As of February 27, 2009,
there has been a decrease of approximately $3.6 million in the fair value of the
available for sale securities held in the Equities Account as compared to their
value on December 28, 2008. Should any of those investments
losses in the Equities Account not recover or any of our investments accounted
for under the cost method, totaling approximately $12.8 million at December 28,
2008, experience declines in value due to conditions that we deem to be other
than temporary, we may recognize additional other than temporary
losses.
|
·
|
Losses
due to investment collectability
|
The
repayment of the $48.0 million principal amount of DFR Notes due in 2012
received in connection with the Deerfield Sale and the payment of related
interest are dependent on the cash flow of DFR, including
Deerfield. DFR’s investment portfolio is comprised primarily of fixed
income investments, including mortgage-backed securities and corporate debt and
its activities also include the asset management business of Deerfield. Among
the factors that may affect DFR’s ability to continue to pay the DFR Notes and
related interest is the current dislocation in the sub-prime mortgage sector and
the continuing weakness in the broader credit market, both of which could
continue to adversely affect DFR and one or more of its lenders, which could
result in increases in its borrowing costs, reductions in its liquidity and
reductions in the value of its investments in its portfolio, all of these
factors could reduce cash flows and may result in an additional provision for
uncollectible notes receivable. We have received all four cash
quarterly interest payments on the DFR Notes to date on a timely basis as well
as dividends on the cumulative preferred stock which was previously
held. Due to significant financial weakness in the credit markets, current
publicly available information of DFR, and our ongoing assessment of the
likelihood of full repayment of the principal amount of the DFR Notes, we
recorded an allowance for doubtful collectability of $21.2 million on the DFR
Notes which is included in the $112.7 million other than temporary losses on
investments disclosed above.
· Valuations
of some of our investments:
Our investments as of
December 28, 2008 include available-for-sale investments, investment
derivatives, other investments accounted for under the cost method and various
investment instruments in liability positions. The available-for-sale
securities, investment derivatives, and various investments in liability
positions include those managed under the Equities Account. We
determine the fair value of our available-for-sale securities and investment
derivatives principally using quoted market prices, broker/dealer prices or
statements of account received from investment managers, which were principally
based on quoted market or broker/dealer prices. Our other
investments accounted for under the cost method are valued almost entirely based
on statements of account received from the investment managers or the investees
which are 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, we rely on unobservable inputs (that are
not corroborated by observable market data) that reflect assumptions market
participants would use in pricing the investment. These inputs are
subjective and thus subject to estimates which could change significantly from
period to period. Those changes in estimates in these cost
investments would be recognized only to the extent of losses which are deemed to
be other than temporary. We believe that the total carrying value of
the cost investments not valued based on quoted market or broker/dealer prices
of approximately $12.0 million as of December 28, 2008 represented their fair
value. We also have $0.8 million of non-marketable cost investments
in securities for which it is not practicable to estimate fair value because the
investments are non-marketable, but we currently believe the carrying amount is
recoverable.
|
·
|
Federal
and state income tax contingencies:
|
We
recognize the income tax benefits and estimated accruals for the resolution of
income tax matters which are subject to future examinations of our U.S. Federal
and state income tax returns by the Internal Revenue Service or state taxing
authorities, including remaining provisions included in “Current liabilities
relating to discontinued operations” in our Consolidated Balance
Sheets:
Effective
January 1, 2007, we adopted FIN 48. As a result, we now measure
income tax uncertainties in accordance with a two-step process of evaluating a
tax position. We first determine if it is more likely than not that a
tax position will be sustained upon examination based on the technical merits of
the position. A tax position that meets the more-likely-than-not
recognition threshold is then measured, for purposes of financial statement
recognition, as the largest amount that has a greater than fifty percent
likelihood of being realized upon effective settlement. With the
adoption of FIN 48, at January 1, 2007 we recognized an increase in our reserves
for uncertain income tax positions of $4.8 million, an increase in our liability
for interest of $0.5 million and an increase in our liability for penalties of
$0.2 million related to uncertain income tax positions. These
increases were partially offset by an increase in a deferred income tax benefit
of $3.2 million. There was also a reduction in the tax related
liabilities of discontinued operations of $0.1 million. The net
effect of all these adjustments was a decrease in retained earnings of $2.2
million. We have unrecognized tax benefits of $30.3 million and $12.3
million, which if resolved favorably would reduce the Company’s tax expense
by $22.2 million and $9.5 million, at December 28, 2008 and December 30, 2007,
respectively.
We
recognize interest accrued related to uncertain tax positions in “Interest
expense” and penalties in “General and administrative expenses”. At
December 28, 2008 and December 30, 2007 we had $6.2 million and $3.4
million accrued for the payment of interest and $1.9 million and $0.2 million
accrued for penalties, both respectively.
As
discussed above in “Liquidity and Capital Resources,” our U.S. Federal income
tax return for the tax period ended December 28, 2008 is under examination as
part of the CAP program. Our U.S. Federal income tax returns for
January 1, 2006 to and including September 29, 2008 are not currently under
examination while certain of our state income tax returns and certain of
Wendy’s state income tax returns for periods prior to the merger are under
examination. We believe that adequate provisions have been made for any
liabilities, including interest and penalties that may result from the
completion of these examinations. To the extent uncertain tax
positions pertaining to the former beverage businesses that we sold in October
2000 are determined to be less than or in excess of the amounts included in
“Current liabilities relating to discontinued operations,” any such material
difference will be recorded at that time as a component of gain or loss on
disposal of discontinued operations.
|
·
|
Legal
and environmental reserves:
|
We have
reserves which total $6.9 million at December 28, 2008 for the resolution of all
of our legal and environmental matters.
Should
the actual cost of settling these matters, whether resulting from adverse
judgments or otherwise, differ from the reserves we have accrued, that
difference will be reflected in our results of operations when the matter is
resolved or when our estimate of the cost changes.
We
operate restaurants that are located on sites owned by us and sites leased by us
from third parties. At inception, each lease is evaluated to
determine whether the lease will be accounted for as an operating or capital
lease in accordance with the provisions of SFAS No. 13, Accounting for Leases, and
other related authoritative guidance under GAAP. When determining the lease term
we include option periods for which failure to renew the lease imposes an
economic detriment. The primary penalty to which we are subject is the
economic detriment associated with the existence of leasehold improvements which
might be impaired if we choose not to exercise the available renewal
options.
For
operating leases, minimum lease payments, including minimum scheduled rent
increases, are recognized as rent expense on a straight line basis
(“Straight-Line Rent”) over the applicable lease terms. Lease terms are
generally for 20 years and, in most cases, provide for rent escalations and
renewal options. The term used for Straight-Line Rent expense is
calculated from the date we obtain possession of the leased premises through the
expected lease termination date at lease inception. We expense rent from
possession date to the restaurant opening date, in accordance with FASB Staff
Position No. 13-1, “Accounting for Rental Costs Incurred during a
Construction Period” (“FSP FAS 13-1”).
There is
a period under certain lease agreements referred to as a rent holiday (“Rent
Holiday”) that generally begins on the possession date and ends on the rent
commencement date. During the Rent Holiday period, no cash rent payments are
typically due under the terms of the lease, however, expense is recorded for
that period consistent with the Straight-Line Rent policy.
For
leases that contain rent escalations, we record the rent payable during the
lease term, as determined above, on the straight-line basis over the term of the
lease (including the rent holiday period beginning upon our possession of the
premises), and record the excess of the Straight-Line Rent over the minimum
rents paid as a deferred lease liability included in “Other liabilities.”
Certain leases contain provisions, referred to as contingent rent (“Contingent
Rent”), that require additional rental payments based upon restaurant sales
volume. Contingent rent is expensed each period as the liability is incurred, in
addition to the Straight-Line Rent.
Favorable
and unfavorable lease amounts are recorded as components of “Other intangible
assets” and “Other liabilities”, respectively, when we purchase restaurants (see
Note 3) and are amortized to “Cost of sales” – both on a straight-line basis
over the remaining term of the leases. Upon early termination of a lease,
the favorable or unfavorable lease balance associated with the lease is
recognized as a loss or gain, respectively, in our results of
operations.
Management,
with the assistance of a valuation firm, makes certain estimates and
assumptions regarding each new lease agreement, lease renewal, and lease
amendment, including, but not limited to property values, property lives,
discount rates, and probable term, all of which can impact (i) the
classification and accounting for a lease as capital or operating, (ii) the rent
holiday and/or escalations in payment that are taken into consideration when
calculating straight-line rent and (iii) the term over which leasehold
improvements for each restaurant are amortized. These estimates and assumptions
may produce materially different amounts of depreciation and amortization,
interest and rent expense that would be reported if different assumed lease
terms were used.
Inflation
and Changing Prices
We
believe that inflation did not have a significant effect on our consolidated
results of operations during the reporting periods since inflation rates
generally remained at relatively low levels.
Seasonality
Our
restaurant operations are moderately impacted by
seasonality. Wendy’s restaurant revenues are normally higher during
the summer months than during the winter months, and Arby’s restaurant revenues
are somewhat lower in our first quarter. Because our businesses are
moderately seasonal, results for any future quarter will not necessarily be
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
December 2007, FASB issued SFAS No. 141 (revised 2007), “Business Combinations”
(“SFAS 141(R)”), and SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements – an amendment of ARB No. 51” (“SFAS
160”). These statements change 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. These
statements are to be applied prospectively beginning with our
2009
fiscal
year. However, upon adoption, SFAS 160 requires entities to apply the
presentation and disclosure requirements retrospectively for all periods
presented. Both standards prohibit early adoption. In
addition, in April 2008, the FASB issued FASB Staff Position No. FAS 142-3,
“Determination of the Useful Life of Intangible Assets” (“FSP FAS
142-3”). In determining the useful life of acquired intangible
assets, FSP FAS 142-3 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. FSP FAS
142-3 also requires expanded disclosure related to the determination of
intangible asset useful lives. This staff position is effective for
financial statements issued for fiscal years beginning in our 2009 fiscal year
and may impact any intangible assets we acquire. The application of
SFAS 160 will require reclassification of our minority interests from a
liability to a component of stockholders’ equity in our consolidated financial
statements beginning in our 2009 fiscal year. The effect of this
reclassification will not be material to our consolidated balance
sheet. Further, all of the statements referred to above could have a
significant impact on the accounting for any future acquisitions starting with
our 2009 fiscal year. The impact will depend upon the nature and
terms of such future acquisitions, if any. These statements will not
have an effect on our accounting for the Wendy’s Merger except for any potential
adjustments to deferred taxes included in the allocation of the purchase price
after such allocation has been finalized.
In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities" ("SFAS 161"). SFAS 161 requires companies with
derivative instruments to disclose information that should 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 SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (“SFAS 133”) and how these items affect a company's financial
position, results of operations and cash flows. SFAS 161 affects only these
disclosures and does not change the accounting for derivatives. SFAS
161 is to be applied prospectively beginning with the first quarter of our 2009
fiscal year. We do not expect SFAS 161 to have a material effect on disclosures
in our consolidated financial statements.
Outlook
for 2009
Sales
Our net
sales will increase significantly for 2009 compared to 2008 as a result of the
Wendy’s Merger; however, we expect same store sales growth to be negatively
impacted by current economic factors. In 2009, the Arby’s marketing
strategy will emphasize Arby’s sliced roasted meat products, including the
launch of the Roastburger; however, given the recent declining economic trends,
we cannot determine what impact these marketing initiatives will have on Arby’s
sales. Wendy’s same-store sales for 2009 are expected to be favorably
impacted by continued operational improvement, premium product introductions and
a comprehensive menu pricing strategy. Offsetting factors include an
uncertain economic environment, a more aggressive marketing focus on value menu
offerings and a reduction in the number of stores serving breakfast while
refining this daypart strategy. We presently plan to open
approximately 5 new Arby’s Company-owned and 10 new Wendy’s Company-owned
restaurants during 2009 and close 11 Arby’s Company-owned and 8 Wendy’s
Company-owned restaurants. We continually review the performance of
any underperforming Company-owned restaurants and evaluate whether to close
those restaurants, particularly in connection with the decision to renew or
extend their leases. Specifically, we have 56 Arby’s and 58 Wendy’s
restaurant leases that are scheduled for renewal or expiration during
2009. We currently anticipate the renewal or extension of 45 Arby’s
leases and 50 Wendy’s leases.
Franchise
Revenues
Our
franchise revenues will increase significantly for 2009 as a result of the
Wendy’s Merger. Franchise revenues will also be favorably impacted by
net new restaurant openings by both Arby’s and Wendy’s franchisee
locations. Despite an overall increase in franchise revenues, the
same-store sales trends for franchised restaurants at Arby’s and Wendy’s will
continue to be generally impacted by the various factors described above under
“Sales.”
Restaurant
Margin
We expect
that our restaurant margins for 2009 will increase primarily as a result of the
impacts of menu price increases, higher margins on new premium menu items and
tighter controls on fixed and semi-variable costs, which are expected to more
than offset the negative impact of more aggressive value menu pricing in our
Wendy’s business and higher labor costs in 2009.
General
and Administrative
We expect
that our general and administrative expense for 2009 will increase significantly
compared to 2008 as a result of the Wendy’s Merger, including integration
costs. This increase will be partially offset by the benefit from the
merger related savings including the combined support center functions for
Wendy’s and Arby’s in Atlanta, Georgia.
Depreciation
and Amortization
We expect
that our depreciation and amortization expense for 2009 will increase compared
to 2008 as a result of the Wendy’s Merger and the full year effect of
depreciation new Arby’s restaurants opened in 2008.
Facilities
Relocation and Corporate Restructuring
We expect
that our facilities relocation and corporate restructuring expense for 2009 will
be higher than 2008 primarily due to Wendy’s Merger related costs.
Interest
Expense
We expect
that our interest expense for 2009 will increase compared to 2008 primarily as a
result of the Wendy’s Merger and the increased interest rates on our amended and
restated Credit Agreement, partially offset by the $143.2 voluntary net
prepayment on the Term Loan in 2008.
Additionally,
we will be writing off deferred financing costs of approximately $4.4 million
related to the Wendy’s credit facility executed in January 2009 because this
facility is being replaced by the amended and restated Credit Agreement, as
described above.
Other
Than Temporary Losses on Investments
As of February 27, 2009,
there has been a decrease of approximately $3.6 million in the fair value of the
available for sale securities held in the Equities Account as compared to their
value on December 28, 2008. Should any of those investments
losses in the Equities Account not recover or any of our investments accounted
for under the cost method experience declines in value due to conditions that we
deem to be other than temporary, we may recognize additional other than
temporary losses on investments.
Item
7A. Quantitative and
Qualitative Disclosures about Market Risk.
Certain
statements we make under this Item 7A constitute “forward-looking statements”
under the Private Securities Litigation Reform Act of 1995. See
“Special Note Regarding Forward-Looking Statements and Projections” in “Part I”
preceding “Item 1.”
We are
exposed to the impact of interest rate changes, changes in commodity prices,
changes in the market 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 its
impact on our earnings and cash flows. Through October 2008, we had
used interest rate caps and/or interest rate swap agreements on a portion of our
variable-rate debt to limit our exposure to the effects of increases in
short-term interest rates on our earnings and cash flows. Due to decreases in
the applicable interest rates on our variable-rate debt, we have not utilized
any interest rate protection vehicles since that time. As of December 28, 2008
our long-term debt, including current portion, aggregated $1,111.6 million and
consisted of $495.9 million of fixed-rate debt, $385.0 million of variable-rate
debt, and $230.7 million of capitalized lease and sale-leaseback
obligations. Our variable interest rate debt primarily consists of
$385.0 million of Arby’s term loan borrowings under a variable-rate senior
secured term loan facility due through 2012. The Amended Arby's Term
Loan and amounts borrowed under the revolving credit facility bear interest at
the borrowers' option at either (1) LIBOR of not less than 2.75% plus 4.0% 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 3.0%. We added $467.0 million of debt as a
result of the Wendy’s Merger. We do not currently plan
to enter into future swap agreements. The fair value of our
fixed-rate debt will increase if interest rates decrease. The fair
market value of our investments in fixed-rate debt securities will decline if
interest rates increase. See below for a discussion of how we manage
this risk.
Commodity
Price Risk
In our
restaurants segments, we purchase certain food products, such as beef, poultry,
pork and cheese, that are affected by changes in commodity prices and, as a
result, we are subject to variability in our food costs. While price
volatility can occur, which would impact profit margins, there are generally
alternative suppliers available. Our ability to recover increased costs through
higher pricing is, at times, limited by the competitive environment in which we
operate. Management monitors our exposure to commodity price
risk.
Arby’s
does not enter into financial instruments to hedge commodity prices or hold any
significant inventories of these commodities. In order to ensure favorable
pricing for its major food products, as well as maintain an adequate supply of
fresh food products, we are members of a purchasing cooperative along with our
franchisees that negotiates contracts with approved suppliers on behalf of the
Arby's system. These contracts establish pricing arrangements, and
historically have limited the variability of these commodity costs, but do not
establish any firm purchase commitments by us or our franchisees.
Wendy’s
employs various purchasing and pricing contract techniques in an effort to
minimize volatility. Generally these techniques can include setting fixed prices
with suppliers generally for one year or less, and setting in advance the price
for products to be delivered in the future by having the supplier enter into
forward arrangements (sometimes referred to as “buying
forward”).
Equity
Market Risk
Our
objective in managing our exposure to changes in the market value of our equity
investments is to balance the risk of the impact of these changes on our
earnings and cash flows with our expectations for long-term investment
returns. One significant exposure to equity price risk relates to our
investments (the “Equities Account”) that are managed by a management company
formed by certain former executives (the “Management Company”), which are
discussed in more detail below.
Foreign
Currency Risk
Our
objective in managing our exposure to foreign currency fluctuations is to limit
the impact of these fluctuations on earnings and cash flows. As of December 28,
2008, our primary exposures to foreign currency risk are primarily related to
fluctuations in our Canadian dollar relative to the U.S. dollar for the Canadian
operations. Exposure outside of North America is limited to the effect of rate
fluctuations on royalties paid by franchisees. To a more limited
extent, we have exposure to foreign currency risk relating to our investments in
certain investment limited partnerships and similar investment entities that
hold foreign securities and a total return swap with respect to a foreign equity
security. We monitor these exposures and periodically determine our
need for the use of strategies intended to lessen or limit our exposure to these
fluctuations. We have exposure to (1) our investment in a joint
venture with Tim Hortons, Inc. (“THI”), (2) investments in a Canadian foreign
subsidiary, and (3) export revenues and related receivables denominated in
foreign currencies which are subject to foreign currency
fluctuations. Wendy’s is a partner in a Canadian restaurant real
estate joint venture with THI (“TimWen”). Wendy’s 50% share of TimWen is
accounted for using the Equity Method. Our foreign subsidiary exposures relate
to restaurants and administrative operations in Canada. The exposure to Canadian
dollar exchange rates on the Company’s cash flows primarily includes imports
paid for by Canadian operations in U.S. dollars and payments from the Company’s
Canadian operations to the Company’s U.S. operations in U.S. dollars, and to a
lesser extent royalties paid by Canadian franchisees. Revenues from foreign
operations for the year ended December 28, 2008 represented 7% of our total
franchise revenues and 3% of our total revenues. For the year ended December 30,
2007, the same percentages were 4% and less than 1%, respectively. Accordingly,
an immediate 10% change in foreign currency exchange rates versus the United
States dollar from their levels at December 28, 2008 and December 30, 2007 would
not have a material effect on our consolidated financial position or results of
operations.
Credit
Risk
Our
credit risk as of December 28, 2008 includes the Series A senior secured notes
of Deerfield Capital Corp. (“DFR”) due in December 2012 (the “DFR Notes”), which
we received in late fiscal 2007 in connection with the sale of our majority
capital interest in Deerfield & Company, LLC (“Deerfield”), which is
discussed in more detail below, and, to a lesser extent, our investments in the
Equities Account that are managed by the Management Company.
On
December 21, 2007, the Company received, as a part of the proceeds of its sale
of Deerfield (the “Deerfield Sale”), $47.9 million principal amount of DFR Notes
with an estimated fair value of $46.2 million at the date of the Deerfield Sale.
The DFR Notes bear interest at the three-month LIBOR (1.47% at December 24,
2008) plus a factor, initially 5% through December 31, 2009, increasing 0.5%
each quarter from January 1, 2010 through June 30, 2011 and 0.25% each quarter
from July 1, 2011 through their maturity. The DFR Notes are secured by certain
equity interests of DFR and certain of its subsidiaries.
The fair
value of the DFR Notes was based on the present value of the probability
weighted average of expected cash flows from the DFR Notes. The Company believed
that this value approximated the fair value of the DFR Notes as of December 27,
2007 due to the close proximity to the Deerfield Sale date. We have received
timely payment of all four quarterly interest payments due on the DFR Notes to
date. Additionally, on October 15, 2008 we received a $1.1 million
dividend on the convertible preferred stock which we previously held.
Accordingly, we did not record valuation reserves on these notes prior to the
fourth quarter of 2008.
The
current dislocation in the sub-prime mortgage sector and continuing weakness in
the broader credit markets has adversely impacted, and may continue to adversely
impact, DFR’s cash flows. Due to the significant continuing weakness in the
credit markets and at DFR based upon current publicly available information, and
our ongoing assessment of the likelihood of full repayment of the principal
amount of the DFR Notes, Company management determined that the probability of
collectability of the full principal amount of the DFR Notes was not likely and
recorded an allowance for doubtful accounts on the DFR Notes of $21.2 million as
of December 28, 2008. The DFR Notes, net of unamortized discount and allowance
for doubtful accounts, amounted to $25.3 and $46.2 million at December 28, 2008
and December 30, 2007, respectively, are included in “Notes
receivable”.
Overall
Market Risk
Our
overall market risk as of December 28, 2008 includes cash equivalents,
investments in the Equities Account that are managed by the Management Company
and our investment in TimWen. We maintain investment holdings of various
issuers, types and maturities. As of December 28, 2008 and December 30, 2007,
these investments were classified in our consolidated balance sheets as follows
(in millions):
|
|
Year-End
|
|
|
|
2008
|
|
|
2007
|
|
Cash
equivalents included in “Cash and cash equivalents” in our consolidated
balance sheets
|
|
$ |
36.8 |
|
|
$ |
60.5 |
|
Current
restricted cash equivalents
|
|
|
20.8 |
|
|
|
- |
|
Short-term
investments
|
|
|
0.2 |
|
|
|
2.6 |
|
Investment
related receivables
|
|
|
0.4 |
|
|
|
0.4 |
|
Non-current
restricted cash equivalents
|
|
|
34.0 |
|
|
|
45.3 |
|
Non-current
investments
|
|
|
133.0 |
|
|
|
141.9 |
|
|
|
$ |
225.2 |
|
|
$ |
250.7 |
|
Certain
liability positions related to investments included in “Other liabilities”
in 2008 and 2007:
|
|
|
|
|
|
|
|
|
Derivatives
in liability positions
|
|
$ |
(3.0 |
) |
|
$ |
(0.3 |
) |
Securities
sold with an obligation to purchase
|
|
|
(16.6 |
) |
|
|
- |
|
|
|
$ |
(19.6 |
) |
|
$ |
(0.3 |
) |
Prior to
2006, we invested $75.0 million in the Equities Account, and in April 2007, we
entered into an agreement under which (1) the Management Company will continue
to manage the Equities Account until at least December 31, 2010, (2) we will not
withdraw our investment from the Equities Account prior to December 31, 2010 and
(3) beginning January 1, 2008, we began to pay management and incentive fees to
the Management Company in an amount customary for other unaffiliated third party
investors with similarly sized investments. The Equities Account is invested
principally in debt and equity securities of a limited number of publicly-traded
companies, cash equivalents and equity derivatives and had a fair value of $37.7
million and $99.3 million as of December 28, 2008 and December 30, 2007,
respectively, detailed below. The fair value of the
Equities Account at December 28, 2008 excludes $47.0 million of restricted cash
released from
the Equities Account to Wendy’s/Arby’s in 2008. We obtained permission
from the Management Company to release this amount from the aforementioned
investment restriction and we are obligated to return this amount to
the Equities
Account by
January 29, 2010. As of
December 28, 2008, the derivatives held in our Equities Account investment
portfolio consisted of a total return swaps on equity securities, and put
options on equity securities. We did not designate any of these strategies as
hedging instruments and, accordingly all of these derivative instruments were
recorded at fair value with changes in fair value recorded in our results of
operations.
The
investments in the Equities Account consist of the following (in
millions):
|
|
December
28, 2008 (b)
|
|
|
December
30, 2007
|
|
Restricted
cash equivalents
|
|
$ |
26.5 |
|
|
$ |
43.3 |
|
Investments
|
|
|
30.4 |
|
|
|
48.3 |
|
Derivatives
in an asset position included in “Investments” (a)
|
|
|
- |
|
|
|
7.6 |
|
Investment
settlement receivable included in “Accounts and notes
receivable”
|
|
|
- |
|
|
|
0.3 |
|
Investment
related receivables included in “Deferred costs and other
assets”
|
|
|
0.4 |
|
|
|
0.1 |
|
Securities
sold with an obligation to purchase included in “Other
liabilities”
|
|
|
(16.6 |
) |
|
|
- |
|
Derivatives
in a liability position included in “Other liabilities”
(a)
|
|
|
(3.0 |
) |
|
|
(0.3 |
) |
Total
fair value
|
|
$ |
37.7 |
|
|
$ |
99.3 |
|
______________________________
(a)
|
We
did not designate any of the derivatives as hedging instruments and,
accordingly, all of these derivative instruments were recorded at fair
value with changes in fair value recorded in our results of
operations.
|
(b)
|
The
fair value of the Equities Account at December 28, 2008 excludes $47.0
million of restricted cash released from the Equities Account in
2008. We obtained permission from the Management Company to
release this amount from the aforementioned investment restriction and we
are obligated to return this amount to the Equities Account by
January 29, 2010.
|
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 money market accounts, and are primarily not in Federal
Deposit Insurance Corporation (“FDIC”) insured accounts, $30.0 million of which
was restricted as of December 28, 2008.
At
December 28, 2008 our investments were classified in the following general types
or categories (in millions):
|
|
|
|
|
|
|
|
Carrying
Value
|
|
Type
|
|
At
Cost
|
|
|
At
Fair Value (a)(b)
|
|
|
Amount
|
|
|
Percent
|
|
Cash
equivalents
|
|
$ |
36.8 |
|
|
$ |
36.8 |
|
|
$ |
36.8 |
|
|
|
16.3 |
% |
Investment
related receivables
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
0.2 |
% |
Current
and non-current restricted cash equivalents
|
|
|
54.8 |
|
|
|
54.8 |
|
|
|
54.8 |
|
|
|
24.3 |
% |
Current
and non-current investments accounted for as available-for-sale
securities
|
|
|
30.2 |
|
|
|
30.4 |
|
|
|
30.4 |
|
|
|
13.5 |
% |
Other
non-current investments in investment limited partnerships accounted for
at cost
|
|
|
8.3 |
|
|
|
7.6 |
|
|
|
8.3 |
|
|
|
3.7 |
% |
Other
non-current investments accounted for at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
4.5 |
|
|
|
5.2 |
|
|
|
4.5 |
|
|
|
2.0 |
% |
Equity
|
|
|
88.0 |
|
|
|
90.0 |
|
|
|
90.0 |
|
|
|
40.0 |
% |
|
|
$ |
223.0 |
|
|
$ |
225.2 |
|
|
$ |
225.2 |
|
|
|
100.0 |
% |
Liability
positions related to investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
derivatives in liability positions
|
|
|
- |
|
|
|
(3.0 |
) |
|
|
(3.0 |
) |
|
|
15.3 |
% |
Securities
sold with an obligation to purchase
|
|
|
(19.8 |
) |
|
|
(16.6 |
) |
|
|
(16.6 |
) |
|
|
84.7 |
% |
|
|
$ |
(19.8 |
) |
|
$ |
(19.6 |
) |
|
$ |
(19.6 |
) |
|
|
100.0 |
% |
_______________________________
(a)
|
There
was no assurance at December 28, 2008 that we would have been able to sell
certain of these investments at these
amounts.
|
(b)
|
Includes
amounts managed in the Equities Account by the Management Company,
detailed above.
|
At
December 30, 2007 our investments were classified in the following general types
or categories (in millions):
|
|
|
|
|
|
|
|
Carrying
Value
|
|
Type
|
|
At
Cost
|
|
|
At
Fair Value (a)(b)
|
|
|
Amount
|
|
|
Percent
|
|
Cash
equivalents
|
|
$ |
60.5 |
|
|
$ |
60.5 |
|
|
$ |
60.5 |
|
|
|
24% |
|
Investment
related receivables
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
0.1% |
|
Current
and non-current investments accounted for as available-for-sale securities
(c)
|
|
|
124.6 |
|
|
|
121.0 |
|
|
|
121.0 |
|
|
|
48.3% |
|
Other
current and non-current investments in investment limited partnerships and
similar investment entities accounted for at cost
|
|
|
2.1 |
|
|
|
2.4 |
|
|
|
2.1 |
|
|
|
0.9% |
|
Other
current and non-current investments accounted for at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
11.9 |
|
|
|
16.5 |
|
|
|
11.9 |
|
|
|
4.7% |
|
Equity
|
|
|
1.9 |
|
|
|
1.6 |
|
|
|
1.9 |
|
|
|
0.8% |
|
Fair
value
|
|
|
5.9 |
|
|
|
7.6 |
|
|
|
7.6 |
|
|
|
3.0% |
|
Non-current
restricted cash equivalents
|
|
|
45.3 |
|
|
|
45.3 |
|
|
|
45.3 |
|
|
|
18.1% |
|
Total
cash equivalents and long investment positions
|
|
$ |
252.6 |
|
|
$ |
255.3 |
|
|
$ |
250.7 |
|
|
|
100.0% |
|
Liability
positions related to investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
derivatives in liability positions
|
|
$ |
- |
|
|
$ |
(0.3 |
) |
|
$ |
(0.3 |
) |
|
|
100.0% |
|
__________________________
(a)
|
There
was no assurance at December 30, 2007 that we would have been able to sell
certain of these investments at these
amounts.
|
(b)
|
Includes
amounts managed in the Equities Account by the Management Company,
detailed above.
|
(c)
|
In
addition to the Equities Account information included in footnote (b),
non-current investments accounted for as available-for-sale securities
includes $70.4 million of the carrying and fair value of DFR preferred
stock, net of unrecognized gain.
|
Our
marketable securities are reported at fair market value and are classified and
accounted for as “available-for-sale” with net unrealized holding gains or
losses, net of income taxes, reported as a separate component of comprehensive
income or loss bypassing net income or loss. Investment limited partnerships and
other non-current investments in which we do not have significant influence over
the investees are accounted for at cost. Unrealized holding gains or
losses, net of income taxes, for derivatives and securities sold with an
obligation to purchase (“short-sales”) are reported as a component of net income
or loss. Realized gains and losses on investment limited partnerships
and other non-current investments recorded at cost are reported as income or
loss in the period in which the securities are sold. Investments in
which we have significant influence over the investees are accounted for in
accordance with the equity method of accounting under 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. The cost-basis component
of investments reflected in the tables above and below represents original cost
less a permanent reduction for any unrealized losses that were deemed 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 December 28, 2008 and December 30, 2007 for which an
immediate adverse market movement causes 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 future earnings and
do not represent the maximum possible loss nor any expected actual loss, even
under adverse conditions, because actual adverse fluctuations would likely
differ. In addition, since our investment portfolio is subject to changes in our
portfolio management strategy, and general market conditions, these estimates
are not necessarily indicative of the actual results which may
occur. As of December 28, 2008, we did not hold any market-risk
sensitive instruments which were entered into for trading
purposes. As such, the table below reflects the risk for those
financial instruments entered into for other than trading purposes as of
December 28, 2008 and December 30, 2007 based upon assumed immediate adverse
effects as noted below (in millions):
|
|
Year-End
2008
|
|
|
|
Carrying
Value
|
|
|
Interest
Rate Risk
|
|
|
Equity
Price Risk
|
|
|
Foreign
Currency Risk
|
|
Cash
equivalents
|
|
$ |
36.8 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(0.4 |
) |
Investment
related receivables
|
|
|
0.4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Current
and non-current restricted cash equivalents
|
|
|
54.8 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Available-for-sale
equity securities
|
|
|
0.2 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Available-for-sale
equity securities – restricted
|
|
|
30.1 |
|
|
|
- |
|
|
|
(3.0 |
) |
|
|
- |
|
Equity
investments
|
|
|
90.0 |
|
|
|
- |
|
|
|
(9.0 |
) |
|
|
(9.0 |
) |
Other
investments
|
|
|
12.8 |
|
|
|
(0.1 |
) |
|
|
(1.2 |
) |
|
|
- |
|
DFR
Notes
|
|
|
25.3 |
|
|
|
(0.3 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
in liability positions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
sold with an obligation to purchase - restricted
|
|
|
(16.6 |
) |
|
|
(0.2 |
) |
|
|
(1.7 |
) |
|
|
- |
|
Total
return swap on equity securities – restricted
|
|
|
(3.0 |
) |
|
|
- |
|
|
|
(1.5 |
) |
|
|
(1.1 |
) |
Long-term
debt, excluding capitalized lease and sale-leaseback
obligations-variable
|
|
|
(385.0 |
) |
|
|
(11.9 |
) |
|
|
- |
|
|
|
- |
|
Long-term
debt, excluding capitalized lease and sale-leaseback
obligations-fixed
|
|
|
(495.9 |
) |
|
|
(61.0 |
) |
|
|
- |
|
|
|
- |
|
|
|
Year-End
2007
|
|
|
|
Carrying
Value
|
|
|
Interest
Rate Risk
|
|
|
Equity
Price Risk
|
|
|
Foreign
Currency Risk
|
|
Cash
equivalents
|
|
$ |
60.5 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Investment
related receivables
|
|
|
0.4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Restricted
cash equivalents – non-current
|
|
|
45.3 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
Account – restricted
|
|
|
48.1 |
|
|
|
- |
|
|
|
(4.8 |
) |
|
|
- |
|
DFR
preferred stock
|
|
|
70.4 |
|
|
|
- |
|
|
|
(7.0 |
) |
|
|
- |
|
Other
|
|
|
2.6 |
|
|
|
- |
|
|
|
(0.3 |
) |
|
|
- |
|
Investment
in Jurlique
|
|
|
8.5 |
|
|
|
- |
|
|
|
(0.9 |
) |
|
|
(0.9 |
) |
Investment
derivatives in the Equities Account:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Put
option on market index
|
|
|
4.9 |
|
|
|
- |
|
|
|
(2.9 |
) |
|
|
- |
|
Total
return swap on an equity security
|
|
|
2.2 |
|
|
|
- |
|
|
|
(2.4 |
) |
|
|
(0.2 |
) |
Put
and call option combinations on
equity securities
|
|
|
0.5 |
|
|
|
- |
|
|
|
(1.4 |
) |
|
|
- |
|
Other
investments
|
|
|
7.4 |
|
|
|
- |
|
|
|
(0.7 |
) |
|
|
- |
|
Interest
rate swaps in an asset position
|
|
|
0.1 |
|
|
|
(0.5 |
) |
|
|
- |
|
|
|
- |
|
DFR
Notes
|
|
|
46.2 |
|
|
|
(0.5 |
) |
|
|
- |
|
|
|
- |
|
Interest
rate swaps in a liability position
|
|
|
(0.4 |
) |
|
|
(0.9 |
) |
|
|
- |
|
|
|
- |
|
Put
and call option combinations on equity securities
|
|
|
(0.3 |
) |
|
|
- |
|
|
|
(2.4 |
) |
|
|
- |
|
Long-term
debt, excluding capitalized lease and sale-leaseback obligations -
variable
|
|
|
(561.1 |
) |
|
|
(20.6 |
) |
|
|
- |
|
|
|
- |
|
The
sensitivity analysis of financial instruments held at December 28, 2008 and
December 30, 2007 assumes (1) an instantaneous one percentage point adverse
change in market interest rates, (2) an instantaneous 10% adverse change in the
equity markets in which we are invested and (3) an instantaneous 10% adverse
change in the foreign currency exchange rates versus the United States dollar,
each from their levels at December 28, 2008 and December 30, 2007, respectively,
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 “Other 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. We have not reduced the equity price risk for
available-for-sale investments and cost investments to the extent of unrealized
gains on certain of those investments, which would limit or eliminate the effect
of the indicated market risk on our results of operations and, for cost
investments, our financial position.
Our cash
equivalents and restricted cash equivalents included $36.8 million and $54.8
million, respectively, as of December 28, 2008 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 December 28, 2008, 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 $495.9 million of fixed-rate debt
and not on our financial position or 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 $385.0 million of
variable-rate long-term debt outstanding as of December 28,
2008.
As of December 30, 2007, a majority of
our debt was variable-rate debt and therefore 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 $561.1 million of variable-rate long-term debt outstanding as of December
30, 2007.
Our variable-rate long-term debt
outstanding as of December 28, 2008 and December 30, 2007 had a weighted average
remaining maturity of approximately three years and four years, respectively. We
had limited our interest rate risk on a portion of this debt by the use of
interest rate swap agreements during all of 2007 and through October 2008.
However, in the current interest environment, we do not currently plan to enter
into new swaps.
For
investments in investment limited partnerships and similar investment entities,
all of which are accounted for at cost, and other non-current investments
included in “Other investments” in the tables above, the decrease in the equity
markets and the change in foreign currency were assumed for this analysis to be
other than temporary. To the extent such entities invest in
convertible bonds which trade primarily on the conversion feature of the
securities rather than on the stated interest rate, this analysis assumed equity
price risk but no interest rate risk. The foreign currency risk
presented excludes those investments where the investment manager has fully
hedged the risk.
Item
8. Financial
Statements and Supplementary Data
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
|
|
66
|
|
68
|
|
69
|
|
70
|
|
71
|
|
74
|
|
78
|
|
78
|
|
85
|
|
87
|
|
91
|
|
91
|
|
93
|
|
94
|
|
97
|
|
101
|
|
104
|
|
106
|
|
106
|
|
108
|
|
110
|
|
113
|
|
114
|
|
121
|
|
122
|
|
123
|
|
123
|
|
124
|
|
124
|
|
124
|
|
125
|
|
127
|
|
129
|
|
130
|
|
136
|
|
137
|
|
138
|
|
142
|
|
Footnote Where Defined
|
2005
Restricted Shares
|
(16)
|
Share-Based
Compensation
|
2006
Restricted Shares
|
(16)
|
Share-Based
Compensation
|
2007
Restricted Shares
|
(16)
|
Share-Based
Compensation
|
2007
Trusts
|
(17)
|
Facilities
Relocation and Corporate Restructuring
|
2008
Restricted Shares
|
(16)
|
Share-Based
Compensation
|
280
BT
|
(1)
|
Summary
of Significant Accounting Policies
|
401(k)
Plans
|
(24)
|
Retirement
Benefit Plans
|
ABP
Plan
|
(24)
|
Retirement
Benefit Plans
|
Adams
|
(28)
|
Legal
and Environmental Matters
|
AFA
|
(10)
|
Long-Term
Debt
|
Affiliate
Lease Guarantees
|
(26)
|
Guarantees
and Other Commitments and Contingencies
|
Amended
Arby’s Term Loan
|
(10)
|
Long-Term
Debt
|
AmeriGas
Eagle
|
(26)
|
Guarantees
and Other Commitments and Contingencies
|
AmeriGas
Propane
|
(26)
|
Guarantees
and Other Commitments and Contingencies
|
APIC
Pool
|
(1)
|
Summary
of Significant Accounting Policies
|
Arby's
|
(1)
|
Summary
of Significant Accounting Policies
|
Arby’s
Credit Agreement
|
(10)
|
Long-Term
Debt
|
Arby's
Restaurant
|
(1)
|
Summary
of Significant Accounting Policies
|
Arby’s
Restaurant Discontinued Operations
|
(23)
|
Discontinued
Operations
|
ARG
|
(1)
|
Summary
of Significant Accounting Policies
|
As
Adjusted
|
(3)
|
Business
Acquisitions and Dispositions
|
Asset
Management
|
(30)
|
Business
Segments
|
Bakery
|
(2)
|
Significant
Risks and Uncertainties
|
Bank
Term Loan
|
(10)
|
Long-Term
Debt
|
Beverage
Discontinued Operations
|
(23)
|
Discontinued
Operations
|
Black-Scholes
Model
|
(1)
|
Summary
of Significant Accounting Policies
|
CAP
|
(14)
|
Income
Taxes
|
Capitalized
Lease Obligations
|
(10)
|
Long-Term
Debt
|
Carrying
Value Difference
|
(1)
|
Summary
of Significant Accounting Policies
|
CDOs
|
(1)
|
Summary
of Significant Accounting Policies
|
CERCLIS
|
(28)
|
Legal
and Environmental Matters
|
CEO
|
(16)
|
Share-Based
Compensation
|
Class
A Common Shares
|
(1)
|
Summary
of Significant Accounting Policies
|
Class
A Common Stock
|
(1)
|
Summary
of Significant Accounting Policies
|
Class
A Options
|
(16)
|
Share-Based
Compensation
|
Class
B Common Shares
|
(1)
|
Summary
of Significant Accounting Policies
|
Class
B Common Stock
|
(1)
|
Summary
of Significant Accounting Policies
|
Class
B Options
|
(16)
|
Share-Based
Compensation
|
Class
B Units
|
(16)
|
Share-Based
Compensation
|
Co-Borrowers
|
(10)
|
Long-Term
Debt
|
Code
|
(1)
|
Summary
of Significant Accounting Policies
|
Company
|
(1)
|
Summary
of Significant Accounting Policies
|
Company’s
Derivative Instruments
|
(1)
|
Summary
of Significant Accounting Policies
|
Contingent
Rent
|
(1)
|
Summary
of Significant Accounting Policies
|
Contractual
Settlements
|
(17)
|
Facilities
Relocation and Corporate Restructuring
|
Conversion
|
(3)
|
Business
Acquisitions and Dispositions
|
Convertible
Notes
|
(5)
|
Income
(Loss) Per Share
|
Convertible
Notes
|
(10)
|
Long-Term
Debt
|
Corporate
Restructuring
|
(17)
|
Facilities
Relocation and Corporate Restructuring
|
Crew
Plan
|
(24)
|
Retirement
Benefit Plans
|
Debentures
|
(10)
|
Long-Term
Debt
|
Deerfield
|
(1)
|
Summary
of Significant Accounting Policies
|
Deerfield
Capital
|
(1)
|
Summary
of Significant Accounting Policies
|
Deerfield
Equity Interests
|
(1)
|
Summary
of Significant Accounting Policies
|
Deerfield
Executive
|
(27)
|
Transactions
with Related Parties
|
Deerfield
Executives
|
(27)
|
Transactions
with Related Parties
|
Deerfield
Sale
|
(1)
|
Summary
of Significant Accounting Policies
|
Deerfield
Severance Agreement
|
(27)
|
Transactions
with Related Parties
|
Deferred
Compensation Trusts
|
(27)
|
Transactions
with Related Parties
|
DFR
|
(1)
|
Summary
of Significant Accounting Policies
|
DFR
Investments
|
(8)
|
Investments
|
DFR
Notes
|
(1)
|
Summary
of Significant Accounting Policies
|
DFR
Restaurant Shares
|
(8)
|
Investments
|
DFR
Stock Purchasers
|
(27)
|
Transactions
with Related Parties
|
DM
Fund
|
(1)
|
Summary
of Significant Accounting Policies
|
Encore
|
(8)
|
Investments
|
Equities
Account
|
(1)
|
Investments
|
Equity
Funds
|
(27)
|
Transactions
with Related Parties
|
Equity
Interests
|
(16)
|
Share-Based
Compensation
|
Equity
Investments
|
(1)
|
Summary
of Significant Accounting Policies
|
Equity
Method
|
(1)
|
Summary
of Significant Accounting Policies
|
Equity
Plans
|
(16)
|
Share-Based
Compensation
|
FASB
|
(1)
|
Summary
of Significant Accounting Policies
|
FDEP
|
(28)
|
Legal
and Environmental Matters
|
FIN
48
|
(1)
|
Summary
of Significant Accounting Policies
|
Form
S-4
|
(28)
|
Legal
and Environmental Matters
|
Former
Executives
|
(16)
|
Share-Based
Compensation
|
Former
Senior Officers
|
(16)
|
Share-Based
Compensation
|
Foundation
|
(27)
|
Transactions
with Related Parties
|
FSP
|
(13)
|
Fair
Value of Financial Instruments
|
FSP
13-1
|
(1)
|
Summary
of Significant Accounting Policies
|
FSP
AIR-1
|
(1)
|
Summary
of Significant Accounting Policies
|
FSP
FAS 142-3
|
(1)
|
Summary
of Significant Accounting Policies
|
FSP
FAS 157-1
|
(13)
|
Fair
Value of Financial Instruments
|
FSP
FAS 157-2
|
(13)
|
Fair
Value of Financial Instruments
|
FSP
FAS 157-3
|
(13)
|
Fair
Value of Financial Instruments
|
Funds
|
(1)
|
Summary
of Significant Accounting Policies
|
Helicopter
Interests
|
(27)
|
Transactions
with Related Parties
|
Incentive
Fee Shares
|
(8)
|
Investments
|
Investments
|
(3)
|
Business
Acquisitions and Dispositions
|
Iron
Curtain
|
(1)
|
Summary
of Significant Accounting Policies
|
IRS
|
(15)
|
Stockholders’
Equity
|
Jurl
|
(1)
|
Summary
of Significant Accounting Policies
|
K12
|
(27)
|
Transactions
with Related Parties
|
Lease
Guarantees
|
(26)
|
Guarantees
and Other Commitments and Contingencies
|
LIBOR
|
(4)
|
DFR
Notes
|
LLC
|
(1)
|
Summary
of Significant Accounting Policies
|
Management
Company
|
(1)
|
Transactions
with Related Parties
|
Management
Company Employees
|
(27)
|
Transactions
with Related Parties
|
Market
Value Approach
|
(13)
|
Fair
Value of Financial Instruments
|
National
Propane
|
(1)
|
Summary
of Significant Accounting Policies
|
Net
Exercise Features
|
(16)
|
Share-Based
Compensation
|
Notes
Payable
|
(10)
|
Long-Term
Debt
|
Opportunities
Fund
|
(1)
|
Summary
of Significant Accounting Policies
|
Other
Than Temporary Losses
|
(1)
|
Summary
of Significant Accounting Policies
|
Package
Options
|
(16)
|
Share-Based
Compensation
|
Payment
Obligations
|
(17)
|
Facilities
Relocation and Corporate Restructuring
|
Preferred
Stock
|
(3)
|
Business
Acquisitions and Dispositions
|
Principals
|
(27)
|
Transactions
with Related Parties
|
Profit
Interests
|
(16)
|
Share-Based
Compensation
|
Rent
Holiday
|
(1)
|
Summary
of Significant Accounting Policies
|
RTM
|
(1)
|
Summary
of Significant Accounting Policies
|
RTM
Acquisition
|
(1)
|
Business
Acquisitions and Dispositions
|
Rollover
|
(1)
|
Summary
of Significant Accounting Policies
|
SAB
108
|
(1)
|
Summary
of Significant Accounting Policies
|
Sale-Leaseback
Obligations
|
(10)
|
Long-Term
Debt
|
SEC
|
(1)
|
Summary
of Significant Accounting Policies
|
Senior
Notes
|
(10)
|
Long-Term
Debt
|
Separation
Date
|
(17)
|
Facilities
Relocation and Corporate Restructuring
|
SEPSCO
|
(1)
|
Summary
of Significant Accounting Policies
|
SEPSCO
Discontinued Operations
|
(23)
|
Discontinued
Operations
|
Services
Agreement
|
(27)
|
Transactions
with Related Parties
|
SFAS
|
(1)
|
Summary
of Significant Accounting Policies
|
SFAS
13
|
(1)
|
Summary
of Significant Accounting Policies
|
SFAS
45
|
(1)
|
Summary
of Significant Accounting Policies
|
SFAS
123
|
(1)
|
Summary
of Significant Accounting
Policies
|
SFAS
123(R)
|
(1)
|
Summary
of Significant Accounting Policies
|
SFAS
133
|
(1)
|
Summary
of Significant Accounting Policies
|
SFAS
141
|
(1)
|
Summary
of Significant Accounting Policies
|
SFAS
141(R)
|
(1)
|
Summary
of Significant Accounting Policies
|
SFAS
142
|
(18)
|
Goodwill
Impairment and Impairment of Other Long-Lived Assets
|
SFAS
157
|
(13)
|
Fair
Value of Financial Instruments
|
SFAS
160
|
(1)
|
Summary
of Significant Accounting Policies
|
SFAS
161
|
(1)
|
Summary
of Significant Accounting Policies
|
Special
Committee
|
(27)
|
Transactions
with Related Parties
|
Straight-Line
Rent
|
(1)
|
Summary
of Significant Accounting Policies
|
Sublease
|
(27)
|
Transactions
with Related Parties
|
Swap
Agreements
|
(12)
|
Derivative
Insturments
|
Sybra
|
(1)
|
Summary
of Significant Accounting Policies
|
Syrup
|
(26)
|
Guarantees
and Other Commitments and Contingencies
|
TDH
|
(1)
|
Summary
of Significant Accounting Policies
|
THI
|
(1)
|
Summary
of Significant Accounting Policies
|
TimWen
|
(1)
|
Summary
of Significant Accounting Policies
|
Triarc
|
(1)
|
Summary
of Significant Accounting Policies
|
We
|
(1)
|
Summary
of Significant Accounting Policies
|
Wendy’s
|
(1)
|
Summary
of Significant Accounting Policies
|
Wendy’s/Arby’s
|
(1)
|
Summary
of Significant Accounting Policies
|
Wendy’s
Crew
|
(24)
|
Retirement
Benefit Plans
|
Wendy’s
Merger
|
(1)
|
Summary
of Significant Accounting Policies
|
Wendy’s
Revolver
|
(10)
|
Long-Term
Debt
|
To the
Stockholders and Board of Directors of
Wendy’s/Arby’s
Group, Inc.
Atlanta,
Georgia
We have
audited the accompanying consolidated balance sheets of Wendy’s/Arby’s Group,
Inc. (formerly Triarc Companies, Inc.) and subsidiaries (the “Company”) as of
December 28, 2008 and December 30, 2007, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the
three years in the period ended December 28, 2008. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 28, 2008 and
December 30, 2007, and the results of its operations and its cash flows for
each of the three years in the period ended December 28, 2008, in conformity
with accounting principles generally accepted in the United States of
America.
As
discussed in Notes 1, 14 and 15 to the consolidated financial statements,
effective December 31, 2006, the Company elected application of Staff Accounting
Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements and, effective January 1, 2007, the
Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - an
interpretation of FASB Statement No. 109, Accounting for Income Taxes and
FASB Staff Position No. AUG-AIR-1, Accounting for Planned Major
Maintenance Activities.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 28, 2008, based on the criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated March 13, 2009 expressed an
unqualified opinion on the Company’s internal control over financial
reporting.
/s/
Deloitte & Touche LLP
Atlanta,
Georgia
March 13,
2009
Item
8. Financial Statements and
Supplementary Data
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
(In
Thousands)
|
|
December 28,
|
|
|
December 30,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
90,090 |
|
|
$ |
78,116 |
|
Restricted
cash equivalents
|
|
|
20,792 |
|
|
|
- |
|
Accounts
and notes receivable
|
|
|
97,258 |
|
|
|
27,610 |
|
Inventories
|
|
|
24,646 |
|
|
|
11,067 |
|
Prepaid
expenses and other current assets
|
|
|
28,990 |
|
|
|
28,540 |
|
Deferred
income tax benefit
|
|
|
37,923 |
|
|
|
24,921 |
|
Advertising
fund restricted assets
|
|
|
81,139 |
|
|
|
- |
|
Total
current assets
|
|
|
380,838 |
|
|
|
170,254 |
|
Restricted
cash equivalents
|
|
|
34,032 |
|
|
|
45,295 |
|
Notes
receivable
|
|
|
34,608 |
|
|
|
46,429 |
|
Investments
|
|
|
133,052 |
|
|
|
141,909 |
|
Properties
|
|
|
1,770,372 |
|
|
|
504,874 |
|
Goodwill
|
|
|
853,775 |
|
|
|
468,778 |
|
Other
intangible assets
|
|
|
1,411,473 |
|
|
|
45,318 |
|
Deferred
costs and other assets
|
|
|
27,470 |
|
|
|
27,660 |
|
Deferred
income tax benefit
|
|
|
- |
|
|
|
4,050 |
|
Total
assets
|
|
$ |
4,645,620 |
|
|
$ |
1,454,567 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
30,426 |
|
|
$ |
27,802 |
|
Accounts
payable
|
|
|
139,340 |
|
|
|
54,297 |
|
Accrued
expenses and other current liabilities
|
|
|
247,334 |
|
|
|
117,785 |
|
Advertising
fund restricted liabilities
|
|
|
81,139 |
|
|
|
- |
|
Liabilities
related to discontinued operations
|
|
|
4,250 |
|
|
|
7,279 |
|
Total
current liabilities
|
|
|
502,489 |
|
|
|
207,163 |
|
Long-term
debt
|
|
|
1,081,151 |
|
|
|
711,531 |
|
Deferred
income
|
|
|
16,859 |
|
|
|
10,861 |
|
Deferred
income taxes
|
|
|
475,243 |
|
|
|
- |
|
Other
liabilities
|
|
|
186,587 |
|
|
|
76,138 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Class
A common stock, $.10 par value; shares authorized:
1,500,000;
|
|
|
47,042 |
|
|
|
2,955 |
|
shares
issued: 470,424 and 29,551 (a)
|
|
|
|
|
|
|
|
|
Class
B common stock, $.10 par value; shares authorized none and
150,000;
|
|
|
- |
|
|
|
6,402 |
|
shares
issued: none and 64,025 (a)
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
2,752,987 |
|
|
|
291,122 |
|
Retained
(deficit) earnings
|
|
|
(357,541 |
) |
|
|
167,267 |
|
Common
stock held in treasury
|
|
|
(15,944 |
) |
|
|
(16,774 |
) |
Accumulated
other comprehensive loss
|
|
|
(43,253 |
) |
|
|
(2,098 |
) |
Total
stockholders’ equity
|
|
|
2,383,291 |
|
|
|
448,874 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
4,645,620 |
|
|
$ |
1,454,567 |
|
See
accompanying notes to consolidated financial statements.
|
(a)
|
In
connection with the September 29, 2008 merger with Wendy’s International,
Inc. (Wendy’s), Wendy’s/Arby’s Group, Inc. stockholders approved a charter
amendment to convert each of the then outstanding shares of Triarc
Companies, Inc. Class B common stock into one share of Wendy’s/Arby’s
Group, Inc. Class A common
stock.
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
(In
Thousands Except Per Share Amounts)
|
|
Year
Ended
|
|
|
|
December
28,
|
|
|
December
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
1,662,291 |
|
|
$ |
1,113,436 |
|
|
$ |
1,073,271 |
|
Franchise
revenues
|
|
|
160,470 |
|
|
|
86,981 |
|
|
|
82,001 |
|
Asset
management and related fees
|
|
|
- |
|
|
|
63,300 |
|
|
|
88,006 |
|
|
|
|
1,822,761 |
|
|
|
1,263,717 |
|
|
|
1,243,278 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,415,534 |
|
|
|
894,450 |
|
|
|
857,211 |
|
Cost
of services
|
|
|
- |
|
|
|
25,183 |
|
|
|
35,277 |
|
General
and administrative
|
|
|
248,718 |
|
|
|
205,375 |
|
|
|
235,776 |
|
Depreciation
and amortization
|
|
|
88,315 |
|
|
|
66,277 |
|
|
|
60,673 |
|
Goodwill
impairment
|
|
|
460,075 |
|
|
|
- |
|
|
|
- |
|
Impairment
of other long-lived assets
|
|
|
19,203 |
|
|
|
7,045 |
|
|
|
5,554 |
|
Facilities
relocation and corporate restructuring
|
|
|
3,913 |
|
|
|
85,417 |
|
|
|
3,273 |
|
Gain
on sale of consolidated business
|
|
|
- |
|
|
|
(40,193 |
) |
|
|
- |
|
Other
operating expense, net
|
|
|
653 |
|
|
|
263 |
|
|
|
887 |
|
|
|
|
2,236,411 |
|
|
|
1,243,817 |
|
|
|
1,198,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) profit
|
|
|
(413,650 |
) |
|
|
19,900 |
|
|
|
44,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(67,009 |
) |
|
|
(61,331 |
) |
|
|
(114,088 |
) |
Gain
(loss) on early extinguishments of debt
|
|
|
3,656 |
|
|
|
- |
|
|
|
(14,082 |
) |
Investment
income, net
|
|
|
9,438 |
|
|
|
62,110 |
|
|
|
84,318 |
|
Other
than temporary losses on investments
|
|
|
(112,741 |
) |
|
|
(9,909 |
) |
|
|
(4,120 |
) |
Other
income (expense), net
|
|
|
(606 |
) |
|
|
(1,356 |
) |
|
|
8,677 |
|
(Loss)
income from continuing operations before income taxes and minority
interests
|
|
|
(580,912 |
) |
|
|
9,414 |
|
|
|
5,332 |
|
Benefit
from (provision for) income taxes
|
|
|
99,294 |
|
|
|
8,354 |
|
|
|
(4,612 |
) |
Minority
interests in income of consolidated subsidiaries
|
|
|
(340 |
) |
|
|
(2,682 |
) |
|
|
(11,523 |
) |
(Loss)
income from continuing operations
|
|
|
(481,958 |
) |
|
|
15,086 |
|
|
|
(10,803 |
) |
Income
(loss) from discontinued operations, net of income taxes
|
|
|
2,217 |
|
|
|
995 |
|
|
|
(129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(479,741 |
) |
|
$ |
16,081 |
|
|
$ |
(10,932 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted (loss) income per share :
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A common stock (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(3.06 |
) |
|
$ |
.15 |
|
|
$ |
(.13 |
) |
Discontinued
operations
|
|
|
.01 |
|
|
|
.01 |
|
|
|
- |
|
Net
(loss) income
|
|
$ |
(3.05 |
) |
|
$ |
.16 |
|
|
$ |
(.13 |
) |
Class
B common stock (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(1.26 |
) |
|
$ |
.17 |
|
|
$ |
(.13 |
) |
Discontinued
operations
|
|
|
.02 |
|
|
|
.01 |
|
|
|
- |
|
Net
(loss) income
|
|
$ |
(1.24 |
) |
|
$ |
.18 |
|
|
$ |
(.13 |
) |
See
accompanying notes to consolidated financial statements.
|
(a) In
connection with the September 29, 2008 merger with Wendy’s, Wendy’s/Arby’s
Group, Inc. stockholders approved a charter amendment to convert each of
the then existing Triarc Companies, Inc. Class B common stock into one
share of Wendy’s/Arby’s Group, Inc. Class A common
stock.
|
WENDY’S/ARBY’S
GROUP, IN C. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
Class
A Common Stock
|
|
|
Class
B Common Stock
|
|
|
Additional
Paid-in Capital
|
|
|
Retained
(Deficit) Earnings
|
|
|
Common
Stock Held in
Treasury
|
|
|
Unrealized
Gain (Loss) on Available- for-Sale
Securities
|
|
|
Unrealized
Gain (Loss) on Cash Flow Hedges
|
|
|
Foreign
Currency Translation
Adjustment
|
|
|
Unrecog-
nized Pension Loss
|
|
|
Total
|
|
Balance
at December 30 2007
|
|
$ |
2,955 |
|
|
$ |
6,402 |
|
|
$ |
291,122 |
|
|
$ |
167,267 |
|
|
$ |
(16,774 |
) |
|
$ |
(2,104 |
) |
|
$ |
(155 |
) |
|
$ |
689 |
|
|
$ |
(528 |
) |
|
$ |
448,874 |
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(479,741 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(479,741 |
) |
Change
in unrealized gain (loss) on available-for-sale securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,212 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,212 |
|
Change
in unrealized gain (loss) on cash flow hedges
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
155 |
|
|
|
- |
|
|
|
- |
|
|
|
155 |
|
Foreign
currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(43,002 |
) |
|
|
- |
|
|
|
(43,002 |
) |
Unrecognized
pension loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(520 |
) |
|
|
(520 |
) |
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(520,896 |
) |
Cash
dividends
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(30,538 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(30,538 |
) |
Accrued
dividends on nonvested restricted stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(65 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(65 |
) |
Distribution
of Deerfield Capital Corp. common stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(14,464 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(14,464 |
) |
Share-based
compensation expense
|
|
|
- |
|
|
|
2 |
|
|
|
9,127 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,129 |
|
Wendy’s
International Inc. merger-related transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Class B common stock to Class A common stock
|
|
|
6,410 |
|
|
|
(6,410 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Value
of Wendy’s stock options converted into Wendy’s/Arby’s Group,
Inc. options
|
|
|
- |
|
|
|
- |
|
|
|
18,495 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
18,495 |
|
Common
stock issuance related to merger of Triarc Companies, Inc. and
Wendy’s International Inc.
|
|
|
37,678 |
|
|
|
- |
|
|
|
2,438,519 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,476,197 |
|
Common
stock issued upon exercises of stock options
|
|
|
- |
|
|
|
- |
|
|
|
(45 |
) |
|
|
- |
|
|
|
60 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
15 |
|
Common
stock issued upon vesting or issuance, as applicable, of restricted
stock
|
|
|
- |
|
|
|
1 |
|
|
|
(3,654 |
) |
|
|
- |
|
|
|
3,627 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(26 |
) |
Common
stock withheld as payment for withholding taxes on capital stock
transactions
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,989 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,989 |
) |
Other
|
|
|
(1 |
) |
|
|
5 |
|
|
|
(577 |
) |
|
|
- |
|
|
|
132 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(441 |
) |
Balance
at December 28, 2008
|
|
$ |
47,042 |
|
|
$ |
- |
|
|
$ |
2,752,987 |
|
|
$ |
(357,541 |
) |
|
$ |
(15,944 |
) |
|
$ |
108 |
|
|
$ |
- |
|
|
$ |
(42,313 |
) |
|
$ |
(1,048 |
) |
|
$ |
2,383,291 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY - CONTINUED
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
Class
A Common Stock
|
|
|
Class
B Common Stock
|
|
|
Additional
Paid-in Capital
|
|
|
Retained
Earnings
|
|
|
Common
Stock Held in
Treasury
|
|
|
Unrealized
Gain (Loss) on Available- for-Sale
Securities
|
|
|
Unrealized
Gain (Loss) on Cash Flow Hedges
|
|
|
Foreign
Currency Translation
Adjustment
|
|
|
Unrecog-
nized Pension Loss
|
|
|
Total
|
|
Balance
at December 31, 2006
|
|
$ |
2,955 |
|
|
$ |
6,366 |
|
|
$ |
311,609 |
|
|
$ |
185,726 |
|
|
$ |
(43,695 |
) |
|
$ |
13,353 |
|
|
$ |
2,237 |
|
|
$ |
(47 |
) |
|
$ |
(691 |
) |
|
$ |
477,813 |
|
Cumulative
effect of change in accounting for uncertainty in income
taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,275 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,275 |
) |
Balance
as adjusted at December 31, 2006
|
|
|
2,955 |
|
|
|
6,366 |
|
|
|
311,609 |
|
|
|
183,451 |
|
|
|
(43,695 |
) |
|
|
13,353 |
|
|
|
2,237 |
|
|
|
(47 |
) |
|
|
(691 |
) |
|
|
475,538 |
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
16,081 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
16,081 |
|
Change
in unrealized gain (loss) on available-for-sale securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(15,457 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(15,457 |
) |
Change
in unrealized gain (loss) on cash flow hedges
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,392 |
) |
|
|
- |
|
|
|
- |
|
|
|
(2,392 |
) |
Foreign
currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
736 |
|
|
|
- |
|
|
|
736 |
|
Recovery
of unrecognized pension loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
163 |
|
|
|
163 |
|
Comprehensive
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(869 |
) |
Cash
dividends
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(32,117 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(32,117 |
) |
Accrued
dividends on nonvested restricted stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(148 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(148 |
) |
Share-based
compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
9,990 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,990 |
|
Common
stock issued upon exercises of stock options
|
|
|
- |
|
|
|
33 |
|
|
|
(2,197 |
) |
|
|
- |
|
|
|
3,534 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,370 |
|
Common
stock received or withheld for exercises of stock options
|
|
|
- |
|
|
|
(15 |
) |
|
|
1,962 |
|
|
|
- |
|
|
|
(1,947 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Common
stock issued upon vesting or issuance, as applicable, of restricted
stock
|
|
|
- |
|
|
|
23 |
|
|
|
(8,005 |
) |
|
|
- |
|
|
|
7,982 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Common
stock withheld as payment for withholding taxes on capital stock
transactions
|
|
|
- |
|
|
|
(5 |
) |
|
|
(682 |
) |
|
|
- |
|
|
|
(4,108 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,795 |
) |
Other
|
|
|
- |
|
|
|
- |
|
|
|
(21,555 |
) |
|
|
- |
|
|
|
21,460 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(95 |
) |
Balance
at December 30, 2007
|
|
$ |
2,955 |
|
|
$ |
6,402 |
|
|
$ |
291,122 |
|
|
$ |
167,267 |
|
|
$ |
(16,774 |
) |
|
$ |
(2,104 |
) |
|
$ |
(155 |
) |
|
$ |
689 |
|
|
$ |
(528 |
) |
|
$ |
448,874 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY - CONTINUED
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
Class
A Common Stock
|
|
|
Class
B Common Stock
|
|
|
Additional
Paid-in Capital
|
|
|
Retained
Earnings
|
|
|
Common
Stock Held in
Treasury
|
|
|
Unearned
Compensation/Note Receivable from Non-Executive Officer
|
|
|
Unrealized
Gain (Loss) on Available- for-Sale
Securities
|
|
|
Unrealized
Gain on Cash Flow Hedges
|
|
|
Foreign
Currency Translation
Adjustment
|
|
|
Unrecog-
nized Pension Loss
|
|
|
Total
|
|
Balance
at January 1, 2006
|
|
$ |
2,955 |
|
|
$ |
5,910 |
|
|
$ |
264,770 |
|
|
$ |
262,059 |
|
|
$ |
(130,179 |
) |
|
$ |
(12,622 |
) |
|
$ |
4,376 |
|
|
$ |
2,048 |
|
|
$ |
45 |
|
|
$ |
(1,018 |
) |
|
$ |
398,344 |
|
Cumulative
effect of unrecorded adjustments from prior years
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,190 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,190 |
|
Balance,
as adjusted, at January 1, 2006
|
|
|
2,955 |
|
|
|
5,910 |
|
|
|
264,770 |
|
|
|
267,249 |
|
|
|
(130,179 |
) |
|
|
(12,622 |
) |
|
|
4,376 |
|
|
|
2,048 |
|
|
|
45 |
|
|
|
(1,018 |
) |
|
|
403,534 |
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(10,932 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(10,932 |
) |
Change
in unrealized gain (loss) on available-for-sale securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,977 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,977 |
|
Change
in unrealized gain (loss) on cash flow hedges
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
189 |
|
|
|
- |
|
|
|
- |
|
|
|
189 |
|
Foreign
currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(92 |
) |
|
|
- |
|
|
|
(92 |
) |
Recovery
of unrecognized pension loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
327 |
|
|
|
327 |
|
Comprehensive
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,531 |
) |
Common
stock issued upon conversion and effective conversion of convertible
notes
|
|
|
- |
|
|
|
163 |
|
|
|
71,460 |
|
|
|
- |
|
|
|
106,195 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
177,818 |
|
Cash
dividends
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(70,040 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(70,040 |
) |
Accrued
dividends on nonvested restricted stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(551 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(551 |
) |
Reversal
of unearned compensation
|
|
|
- |
|
|
|
- |
|
|
|
(12,103 |
) |
|
|
- |
|
|
|
- |
|
|
|
12,103 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Share-based
compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
15,889 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
15,889 |
|
Common
stock issued upon exercises of stock options
|
|
|
- |
|
|
|
1,139 |
|
|
|
(149,340 |
) |
|
|
- |
|
|
|
156,797 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,596 |
|
Common
stock received or withheld for exercise of stock options
|
|
|
- |
|
|
|
(646 |
) |
|
|
162,348 |
|
|
|
- |
|
|
|
(161,702 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Common
stock issued upon vesting of restricted stock
|
|
|
- |
|
|
|
- |
|
|
|
(2,758 |
) |
|
|
- |
|
|
|
2,758 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Common
stock withheld as payment for withholding taxes on capital stock
transactions
|
|
|
- |
|
|
|
(200 |
) |
|
|
(38,776 |
) |
|
|
- |
|
|
|
(17,600 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(56,576 |
) |
Collection
of note receivable from non-executive officer
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
519 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
519 |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
119 |
|
|
|
- |
|
|
|
36 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
155 |
|
Balance
at December 31, 2006
|
|
$ |
2,955 |
|
|
$ |
6,366 |
|
|
$ |
311,609 |
|
|
$ |
185,726 |
|
|
$ |
(43,695 |
) |
|
$ |
- |
|
|
$ |
13,353 |
|
|
$ |
2,237 |
|
|
$ |
(47 |
) |
|
$ |
(691 |
) |
|
$ |
477,813 |
|
See
accompanying notes to consolidated financial statements
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
(In
Thousands)
|
|
Year
Ended
|
|
|
|
December
28,
|
|
|
December
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from continuing operating activities:
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(479,741 |
) |
|
$ |
16,081 |
|
|
$ |
(10,932 |
) |
Adjustments
to reconcile net (loss) income to net cash provided by
continuing operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
impairment
|
|
|
460,075 |
|
|
|
- |
|
|
|
- |
|
Operating
investment adjustments, net (see below)
|
|
|
105,357 |
|
|
|
(33,525 |
) |
|
|
574,393 |
|
Depreciation
and amortization
|
|
|
88,315 |
|
|
|
66,277 |
|
|
|
60,673 |
|
Impairment
of other long-lived assets
|
|
|
19,203 |
|
|
|
7,045 |
|
|
|
5,554 |
|
Share-based
compensation provision
|
|
|
9,129 |
|
|
|
9,990 |
|
|
|
15,889 |
|
Write-off
and amortization of deferred financing costs
|
|
|
8,885 |
|
|
|
2,038 |
|
|
|
7,121 |
|
Non-cash
rent expense
|
|
|
3,103 |
|
|
|
1,528 |
|
|
|
875 |
|
Minority
interests in income of consolidated subsidiaries
|
|
|
340 |
|
|
|
2,682 |
|
|
|
11,523 |
|
Deferred
income tax benefit
|
|
|
(105,276 |
) |
|
|
(10,777 |
) |
|
|
(14 |
) |
Net
(recognition) receipt of deferred vendor incentive
|
|
|
(6,459 |
) |
|
|
(990 |
) |
|
|
5,828 |
|
Payment
of withholding taxes relating to share-based compensation
|
|
|
(2,989 |
) |
|
|
(4,795 |
) |
|
|
(56,576 |
) |
(Income)
loss from discontinued operations
|
|
|
(2,217 |
) |
|
|
(995 |
) |
|
|
129 |
|
Gain
on sale of consolidated business
|
|
|
- |
|
|
|
(40,193 |
) |
|
|
- |
|
Other,
net
|
|
|
2,775 |
|
|
|
2,970 |
|
|
|
(5,873 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
and notes receivable
|
|
|
(4,187 |
) |
|
|
15,022 |
|
|
|
2,771 |
|
Inventories
|
|
|
(140 |
) |
|
|
(987 |
) |
|
|
1,072 |
|
Prepaid
expenses and other current assets
|
|
|
8,808 |
|
|
|
(3,123 |
) |
|
|
(2,719 |
) |
Accounts
payable, accrued expenses, and other current liabilities
|
|
|
(31,376 |
) |
|
|
(7,444 |
) |
|
|
(7,663 |
) |
Net
cash provided by continuing operating activities (a)
|
|
|
73,605 |
|
|
|
20,804 |
|
|
|
602,051 |
|
Cash
flows from continuing investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(106,989 |
) |
|
|
(72,990 |
) |
|
|
(80,250 |
) |
Proceeds
from dispositions
|
|
|
1,322 |
|
|
|
2,734 |
|
|
|
8,081 |
|
Costs
of the merger with Wendy’s
|
|
|
(18,403 |
) |
|
|
(2,017 |
) |
|
|
- |
|
Increase
in cash from the merger with Wendy’s
|
|
|
199,785 |
|
|
|
- |
|
|
|
- |
|
Cost
of other business acquisitions, less cash acquired
|
|
|
(9,622 |
) |
|
|
(4,094 |
) |
|
|
(2,886 |
) |
Decrease
in cash related to the sale of a consolidated business
|
|
|
- |
|
|
|
(15,104 |
) |
|
|
- |
|
Investing investment
activities, net (see below)
|
|
|
51,066 |
|
|
|
51,531 |
|
|
|
(426,653 |
) |
Other,
net
|
|
|
(228 |
) |
|
|
16 |
|
|
|
(2,737 |
) |
Net
cash provided by (used in) continuing investing activities
|
|
|
116,931 |
|
|
|
(39,924 |
) |
|
|
(504,445 |
) |
Cash
flows from continuing financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from long-term debt
|
|
|
37,753 |
|
|
|
23,060 |
|
|
|
25,876 |
|
Repayments
of notes payable and long-term debt
|
|
|
(177,883 |
) |
|
|
(24,505 |
) |
|
|
(76,721 |
) |
Dividends
paid
|
|
|
(30,538 |
) |
|
|
(32,117 |
) |
|
|
(70,040 |
) |
Distributions
to minority interests
|
|
|
(1,144 |
) |
|
|
(13,494 |
) |
|
|
(39,932 |
) |
Other,
net
|
|
|
(1,113 |
) |
|
|
(3,147 |
) |
|
|
8,596 |
|
Net
cash used in continuing financing activities
|
|
|
(172,925 |
) |
|
|
(50,203 |
) |
|
|
(152,221 |
) |
Effect
of exchange rate changes on cash
|
|
|
(4,123 |
) |
|
|
- |
|
|
|
- |
|
Net
cash provided by (used in) continuing operations
|
|
|
13,488 |
|
|
|
(69,323 |
) |
|
|
(54,615 |
) |
Net
cash used in operating activities of discontinued
operations
|
|
|
(1,514 |
) |
|
|
(713 |
) |
|
|
(73 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
11,974 |
|
|
|
(70,036 |
) |
|
|
(54,688 |
) |
Cash
and cash equivalents at beginning of year
|
|
|
78,116 |
|
|
|
148,152 |
|
|
|
202,840 |
|
Cash
and cash equivalents at end of year
|
|
$ |
90,090 |
|
|
$ |
78,116 |
|
|
$ |
148,152 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
CONSOLIDATED
STATEMENTS OF CASH FLOWS - CONTINUED
(In
Thousands)
|
|
Year
Ended
|
|
|
|
December
28,
|
|
|
December
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Detail
of cash flows related to investments (a):
|
|
|
|
|
|
|
|
|
|
Operating
investment adjustments, net:
|
|
|
|
|
|
|
|
|
|
Other
than temporary losses on investments (b)
|
|
$ |
112,741 |
|
|
$ |
9,909 |
|
|
$ |
4,120 |
|
Net
recognized (gains) losses from trading securities, derivatives, and
securities sold short
|
|
|
(7,281 |
) |
|
|
(3,686 |
) |
|
|
262 |
|
Other
net recognized gains
|
|
|
(103 |
) |
|
|
(47,721 |
) |
|
|
(10,822 |
) |
Proceeds
from sales of trading securities and net settlements of trading
derivatives
|
|
|
- |
|
|
|
6,017 |
|
|
|
7,411,584 |
|
Cost
of trading securities purchased
|
|
|
- |
|
|
|
(230 |
) |
|
|
(6,832,255 |
) |
Other,
net
|
|
|
- |
|
|
|
2,186 |
|
|
|
1,504 |
|
|
|
$ |
105,357 |
|
|
$ |
(33,525 |
) |
|
$ |
574,393 |
|
Investing
investment activities, net (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sales of available-for-sale securities and other
investments
|
|
$ |
90,825 |
|
|
$ |
161,857 |
|
|
$ |
169,524 |
|
Proceeds
from securities sold short
|
|
|
45,923 |
|
|
|
- |
|
|
|
8,624,893 |
|
Decrease
(increase) in restricted cash collateralizing securities obligations or
held for investment
|
|
|
17,724 |
|
|
|
(34,297 |
) |
|
|
335,001 |
|
Cost
of available-for-sale securities and other non-trading investments
purchased
|
|
|
(86,853 |
) |
|
|
(76,029 |
) |
|
|
(91,105 |
) |
Payments
to cover short positions in securities
|
|
|
(16,553 |
) |
|
|
- |
|
|
|
(8,943,610 |
) |
Net
payments under repurchase agreements
|
|
|
- |
|
|
|
- |
|
|
|
(521,356 |
) |
|
|
$ |
51,066 |
|
|
$ |
51,531 |
|
|
$ |
(426,653 |
) |
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year in continuing operations for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
61,192 |
|
|
$ |
57,309 |
|
|
$ |
119,968 |
|
Income
taxes, net of refunds
|
|
$ |
5,094 |
|
|
$ |
5,455 |
|
|
$ |
1,265 |
|
Supplemental
schedule of noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital expenditures
|
|
$ |
115,419 |
|
|
$ |
87,456 |
|
|
$ |
97,946 |
|
Capital
expenditures paid in cash
|
|
$ |
(106,989 |
) |
|
$ |
(72,990 |
) |
|
$ |
(80,250 |
) |
Non-cash
capitalized lease and certain sales-leaseback obligations
|
|
$ |
8,430 |
|
|
$ |
14,466 |
|
|
$ |
17,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
additions to long-term debt from acquisitions
|
|
$ |
9,621 |
|
|
$ |
3,366 |
|
|
$ |
7,194 |
|
(a) Net
cash provided by continuing operating activities for the year ended December 31,
2006 reflects the significant net sales of trading securities and net
settlements of trading derivatives, the proceeds from which were principally
used to cover short positions in securities and make payments under repurchase
agreements. These purchases and sales were principally transacted
through an investment fund, Deerfield Opportunities Fund, LLC (the
“Opportunities Fund”), which employed leverage in its trading activities and
which, through September 29, 2006, was consolidated in these consolidated
financial statements. Wendy’s/Arby’s (collectively with its
subsidiaries, the “Company”) effectively redeemed its investment in the
Opportunities Fund, which in turn had liquidated substantially all of its
investment positions, effective September 29, 2006. Accordingly, we
no longer consolidate the cash flows of the Opportunities Fund subsequent to
September 29, 2006. Under accounting principles generally accepted in
the United States of America, the net sales (purchases) of trading securities
and the net settlements of trading derivatives must be reported in continuing
operating activities, while the net proceeds from (payments to cover) securities
sold short and the payments under repurchase agreements are reported in
continuing investing activities.
(b)
The 2008 amount relates to other than temporary losses on investments including
$68,086 for a write down of our investment in Deerfield Capital Corp. common
stock as described in Note 3, $21,227 for an allowance for doubtful accounts on
our DFR notes as described in Note 4, $8,504 for a write down of our entire
remaining investment in Jurlique International Pty Ltd. as described in Note 20,
$13,109 for reductions in the value of certain of our available for sale
securities as described in Note 8, and $1,815 in a cost investment.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
CONSOLIDATED
STATEMENTS OF CASH FLOWS - CONTINUED
(In
Thousands)
Due to their non-cash
nature, the following transactions are not reflected in the respective
consolidated statements of cash flows:
On
September 29, 2008, the Company completed its merger with Wendy’s International,
Inc. (“Wendy’s”). Total preliminary equity consideration of $2,494,692 included
$2,476,197 of Wendy’s/Arby’s common stock issued in exchange for Wendy’s common
shares and $18,495 of value for Wendy’s stock options that have been converted
into Wendy’s/Arby’s options. The accounting for this merger is preliminary
and is subject to change. In conjunction with this merger, assets were
acquired and liabilities were assumed as follows (in thousands):
Fair
value of assets acquired, including cash acquired of
$199,785
|
|
$ |
3,958,204 |
|
Liabilities
assumed
|
|
$ |
1,463,512 |
|
During
2008, the Company acquired 41 restaurants in the California market and, included
in the consideration, was the assumption of $6,239 of debt.
See
Note 3 for further disclosure of these acquisitions.
In
connection with the exercise of stock options and the vesting of restricted
stock, the Company withheld from delivery to employees, the following number of
shares of the Company’s class A and class B common stock during each of the
years presented to satisfy minimum statutory withholding taxes in
connection with the delivery of shares upon the exercise of stock options and
the vesting of restricted stock:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Class
A common stock
|
|
|
591 |
|
|
|
1,150 |
|
|
|
763,519 |
|
Class
B common stock
|
|
|
25 |
|
|
|
281,175 |
|
|
|
2,087,442 |
|
The
aggregate value of shares withheld to satisfy minimum withholding taxes was
recorded in "Stockholders' equity" in the following manner, all offset by an
increase in “Accrued expenses and other current liabilities,” representing the
fair value of the shares withheld for taxes :
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Class
B common stock
|
|
$ |
- |
|
|
$ |
5 |
|
|
$ |
200 |
|
Additional
paid-in capital
|
|
|
- |
|
|
|
682 |
|
|
|
38,776 |
|
Common
stock held in treasury
|
|
|
2,989 |
|
|
|
4,108 |
|
|
|
17,600 |
|
Total
|
|
$ |
2,989 |
|
|
$ |
4,795 |
|
|
$ |
56,576 |
|
During
2008, the Company distributed 9,835 shares of DFR common stock, which included
the conversion of the preferred stock referred to above and the 206 common
shares of DFR distributed to us in connection with the Deerfield Sale, to its
stockholders.
On
December 21, 2007, the Company completed the sale of its 63.6% capital interest
in Deerfield & Company, LLC (“the Deerfield Sale”), its former asset
management business, to Deerfield Capital Corp. (“DFR”), resulting in non-cash
proceeds aggregating $134,608 consisting of (1) 9,629 preferred shares of a
subsidiary of DFR with a then estimated fair value of $88,398 and (2) $47,986
principal amount of series A senior secured notes of DFR due in December 2012
with a then estimated fair value of $46,210. The sale resulted in a
use of cash of $15,104, of which $13,609 relates to cash and cash equivalents
included in the asset management business at the time of the sale and $1,495
relates to fees and expenses paid.
See Note
3 for further disclosure of this disposition and the dividend of DFR common
stock.
During
2006, an aggregate $172,900 principal amount of the Company’s 5% convertible
notes due 2023 (the “Convertible Notes”) were converted or effectively converted
into an aggregate of 4,323 shares of class A common stock and 8,645 shares of
class B common stock (see Note 10). In order to induce the effective
conversions, the Company paid negotiated premiums aggregating $8,998 to certain
converting noteholders consisting of cash of $4,975 and 244 shares of class B
common stock with an aggregate fair value of $4,023 based on the closing market
price of the Company’s class B common stock on the dates of the effective
conversions. The aggregate resulting increase to “Stockholders’
equity” was $177,818 consisting of the $172,900 principal amount of the
Convertible Notes, the $4,023 fair value for the shares issued for premiums and
the $895 fair value of 54,000 shares of class B common stock issued to certain
note holders who agreed to receive such shares in lieu of a cash payment for
accrued interest.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
CONSOLIDATED
STATEMENTS OF CASH FLOWS - CONTINUED
(In
Thousands)
On
December 14, 2006 the Company amended all outstanding stock options under its
equity plans to permit optionees to pay both the exercise price and applicable
minimum statutory withholding taxes by having the Company withhold shares that
would have been issued to the optionee upon exercise. During 2006 the
Company withheld from delivery to employees of the Company an aggregate of 1,720
and 6,466 shares of the Company’s class A and class B common stock,
respectively, to pay the exercise price related to the exercise of stock
options. The aggregate fair value of the shares withheld of $162,348
was recorded within “Stockholders’ equity,” consisting of charges of $161,702 to
“Common stock held in treasury” and $646 to “Class B common stock,” both with an
equal offsetting increase in “Additional paid-in capital.”
Prior to
2006, the Company granted certain officers and key employees 149 and 731
contingently issuable performance-based restricted shares of class A common
stock and class B common stock (the “2005 Restricted Shares”), respectively,
under one of its
equity plans. The 2005 Restricted Shares vest or vested ratably over
three years, subject to meeting, in each case, certain increasing class B common
stock market price targets. An aggregate of 99 and 49 restricted
shares of class A common stock and 482 and 243 restricted shares of class B
common stock each in 2007 and 2006, respectively, vested and the aggregate fair
value of the shares vested of $7,982 and $2,758 in 2007 and 2006,
respectively, was recorded within “Stockholders’ equity” as a charge to
“Additional paid-in capital” with an equal offsetting credit in “Common stock
held in treasury.” The remaining 6 unissued restricted shares of
class B common stock were cancelled. See Notes 15 and 16 for further
disclosure of this transaction.
See
accompanying notes to consolidated financial statements
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(In
Thousands Except Per Share Amounts)
Principles
of consolidation
Effective
September 29, 2008, in conjunction with the merger (the “Wendy’s Merger”) with
Wendy’s International, Inc. (“Wendy’s”) the corporate name of Triarc Companies,
Inc. (“Triarc”) changed to Wendy’s/Arby’s Group, Inc. (“Wendy’s/Arby’s” and,
together with its subsidiaries, the “Company” or “We”). The merger is
being accounted for using the purchase method of accounting in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 141, Business
Combinations. In accordance with this standard, we have concluded
that Wendy’s/Arby’s is the acquirer for financial accounting purposes.
Accordingly, the consolidated financial statements include the accounts of
Wendy’s subsequent to September 29, 2008. The principal subsidiaries of the
Company as of December 28, 2008 are Wendy’s and Arby’s Restaurant Group, Inc.
(“ARG”). ARG is a wholly-owned subsidiary that owns Arby’s, LLC
(“Arby’s”), Sybra, LLC (“Sybra”) and Arby’s Restaurant, LLC (“Arby’s
Restaurant”). Sybra and Arby’s Restaurant own the entities comprising
the RTM Restaurant Group (“RTM”), which was acquired by the Company in 2005 (the
“RTM Acquisition”).
Deerfield
& Company, LLC (“Deerfield”) was also a principal subsidiary of the Company
until it was sold (the “Deerfield Sale”) on December 21, 2007. As of
January 3, 2005, the Company owned, through Triarc Deerfield Holdings, LLC
(“TDH”), a then wholly owned subsidiary, a 63.6% capital interest and a 61.5%
profits interest in Deerfield. Deerfield owns Deerfield Capital
Management LLC (“Deerfield Capital”). On November 10, 2005, pursuant
to an equity arrangement approved by the Company, certain members of Triarc’s
then current management subscribed for equity interests (the “Deerfield Equity
Interests”) in TDH, each of which consisted of a capital interest portion and a
profits interest portion. The Deerfield Equity Interests had the
effective result of reducing the Company’s 61.5% interest in the profits of
Deerfield to as low as 52.3%, depending on the level of Deerfield
profits. As defined in the TDH equity arrangement, the Deerfield Sale
is an event of dissolution. As a result, TDH was liquidated and its
remaining assets distributed during 2008 to its members as calculated in
accordance with the equity arrangement.
The 2006
consolidated financial statements also include the accounts of Deerfield
Opportunities Fund, LLC (the “Opportunities Fund”) and the DM Fund, LLC (the “DM
Fund”) in which the Company owned a 67% capital interest through the dates of
the Company’s effective redemptions of its investments on September 29, 2006 and
December 31, 2006, respectively.
The
Company’s other subsidiaries as of December 28, 2008 that are referred to in
these notes to consolidated financial statements include National Propane
Corporation (“National Propane”); SEPSCO, LLC (“SEPSCO”); Citrus Acquisition
Corporation which owns 100% of Adams Packing Association, Inc. (“Adams”);
Madison West Associates Corp. which owns 80.1% of 280 BT Holdings LLC (“280
BT”); and Jurl Holdings, LLC (“Jurl”) (see Note 27).
The
Company consolidates local Arby’s advertising cooperatives for which the Company
has a greater than 50% voting interest (43 cooperatives as of December 28,
2008). The Company also participates in three national advertising
funds established to collect and administer funds contributed for use in
advertising and promotional programs for Company-owned and franchised stores. In
accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 45, “Accounting for Franchisee Fee Revenue” (“SFAS 45”), the revenue,
expenses and cash flows of all such advertising funds are not included in the
Company’s Consolidated Statements of Operations or Consolidated Statements of
Cash Flows because the contributions to these advertising funds are designated
for specific purposes, and the Company acts as an, in substance, agent with
regard to these contributions. The restricted assets and liabilities are
reported as “Advertising fund restricted assets” and “Advertising fund
restricted liabilities”, respectively on the Company’s Consolidated Balance
Sheets as of December 28, 2008.
All
intercompany balances and transactions have been eliminated in
consolidation. See Note 3 for further disclosure of the acquisitions
and dispositions referred to above.
Fiscal
year
Our
fiscal reporting periods consist of 52 weeks ending on the Sunday closest to
December 31 and are referred to herein as (1) “the year ended December 28, 2008”
or “2008” which commenced on December 31, 2007 and ended on December 28, 2008,
(2) “the year ended December 30, 2007” or “2007” which commenced on January 1,
2007 and ended on December 30, 2007, and (3) “the year ended December 31, 2006”
or “2006” which commenced on January 2, 2006 and ended on December 31, 2006
except that (a) Deerfield and the DM Fund were included on a calendar year basis
and (b) the Opportunities Fund was included from January 1, 2006 through its
September 29, 2006 redemption date. Balances presented as of December
28, 2008 and December 30, 2007 are referred to herein as “as of Year-End 2008”
and “as of Year-End 2007,” respectively. With the exception of
Deerfield, the Opportunities Fund, and the DM Fund, which reported on a calendar
year basis, all references to years relate to fiscal periods rather than
calendar periods. The difference in reporting basis in 2006 is not material to
our consolidated financial statements.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
Cash equivalents
All
highly liquid investments with a maturity of three months or less when acquired
are considered cash equivalents. The Company’s cash equivalents principally
consist of cash in bank, money market and mutual fund money market accounts and
are primarily not in Federal Deposit Insurance Corporation (FDIC) insured
accounts.
Accounts
and notes receivable
Accounts
and notes receivable consist primarily of royalty and franchise fee receivables,
credit card receivables, rent and recoverable income tax. The need for an
allowance for doubtful accounts is reviewed on a specific franchisee basis based
upon past due balances and the financial strength of the
franchisee.
Notes
receivable (non-current)
Notes
receivable (non-current) consist of the (1) notes receivable (“DFR Notes”) due
from Deerfield Capital Corp. (“DFR”) received as proceeds in the Deerfield Sale
(see Note 4 regarding collectability) and (2) notes receivable for franchisee
obligations. The need for an allowance for doubtful accounts is reviewed on a
specific identification basis based upon past due balances and the financial
strength of the franchisee.
Inventories
The
Company’s inventories are stated at the lower of cost or market with cost
determined in accordance with the first-in, first-out method, and consist
primarily of restaurant food items, kids’ meal toys and paper
supplies.
Investments
Short-term
investments
Short-term
investments consist of marketable equity securities with readily determinable
fair values. The Company’s marketable equity securities are classified and
accounted for as “available-for-sale” and are reported at fair market value with
the resulting net unrealized holding gains or losses, net of income taxes,
reported as a separate component of comprehensive income (loss) bypassing net
income. The Company uses the specific identification method to determine the
amount reclassified out of accumulated other comprehensive income (loss) into
earnings or losses of securities sold for all marketable
securities.
See Note
6 for further disclosure of the Company’s short-term investments.
Investments
The
Company’s investments (see Note 8) include (1) investments included in brokerage
accounts (“Equities Account”) being managed by a management company (the
“Management Company”) (see Note 27), (2) our 50% share in a partnership in a
Canadian restaurant real estate joint venture (“TimWen”) with Tim Hortons Inc.
(“THI”), (3) investments in preferred and common stock of DFR (see Note 3), and
(4) cost investments. Investments in limited partnerships and other
non-current investments in which we do not have significant influence over the
investees are recorded at cost (the “Cost Method”), and for which realized gains
and losses are reported as income or loss in the period in which the securities
are sold or otherwise disposed. Investments in which we have
significant influence over the investees (“Equity Investments”) are accounted
for in accordance with the “Equity Method” of accounting under which our results
of operations include our share of the income or loss of the investees.
Unrealized holding gains or losses, net of income taxes, for derivatives are
reported as a component of net income or loss.
The
difference, if any, between the carrying value of the Company’s Equity
Investments and its underlying equity in the net assets of each investee (the
“Carrying Value Difference”) is accounted for as if the investee were a
consolidated subsidiary. Accordingly, the Carrying Value Difference
is amortized over the estimated lives of the assets of the investee to which
such difference would have been allocated if the Equity Investment were a
consolidated subsidiary. To the extent the Carrying Value Difference
represents goodwill, it is not amortized.
See Note
8 for further disclosure of the Company’s Investments.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
Securities
sold with an obligation to purchase
Securities
sold with an obligation to purchase are reported at fair market value with the
resulting net unrealized gains or losses included as a component of net income
or loss.
All
investments
The
Company reviews all of its investments with unrealized losses and recognizes
investment losses currently for any unrealized losses deemed to be other than
temporary (“Other Than Temporary Losses”). These investment losses
are recognized as a component of net income. For investments other than
preferred shares of collateralized debt obligation vehicles (“CDOs”) for which
the Company acted as collateral manager through the date of the Deerfield Sale,
the Company considers such factors as the length of time the market value of an
investment has been below its carrying value, the severity of the decline, the
financial condition of the investee and the prospect for future recovery in the
market value of the investment, including the Company’s ability and intent to
hold the investments for a period of time sufficient for a forecasted recovery.
With respect to available-for-sale securities, the effect of the permanent
reduction in the cost basis is an increase in the net unrealized gain or a
decrease in the net unrealized loss on the available-for-sale investments
component of “Comprehensive income (loss).” The cost-basis component
of investments represents original cost less a permanent reduction for any
unrealized losses that were deemed to be other than temporary. For preferred
shares of CDOs, the Company considered, through the date of the Deerfield Sale,
whether there had been any adverse change in the estimated cash flows of the
investments in the CDOs as well as the prospect for future recovery, including
the Company’s ability and intent to hold the investments for a period of time
sufficient for a forecasted recovery.
Properties
and depreciation and amortization
Properties
are stated at cost, including internal costs of employees to the extent such
employees are dedicated to specific restaurant construction projects, less
accumulated depreciation and amortization. Depreciation and
amortization of properties is computed principally on the straight-line basis
using the following estimated useful lives of the related major classes of
properties: 1 to 15 years for office and restaurant equipment, 3 to
15 years for transportation equipment, 7 to 30 years for buildings and 7 to 20
years for owned site improvements. Leased assets capitalized and
leasehold improvements are amortized over the shorter of their estimated useful
lives or the terms of the respective leases, including periods covered by
renewal options that the Company believes it is reasonably assured of
exercising.
Amortization
of intangibles and deferred costs
Goodwill,
representing the excess of the cost of an acquired entity over the fair value of
the acquired net assets, is not amortized.
Other
intangible assets are amortized on the straight-line basis using the following
estimated useful lives of the related classes of intangibles: the terms of the
respective leases, including periods covered by renewal options that the Company
is reasonably assured of exercising, for favorable leases; 21 years for
franchise agreements, 1 to 5 years for costs of computer software, 20 years for
reacquired rights under franchise agreements, 15 years for trademarks with a
definite life and distribution rights, except those acquired in the Wendy’s
Merger, and 3 to 8 years for non-compete agreements. Trademarks acquired in the
Wendy’s Merger have an indefinite life and are not amortized. Asset management
contracts, through the date of the Deerfield Sale, were amortized on the
straight-line basis over their estimated lives of 5 to 27 years for CDO
contracts and 15 years for contracts under which the Company managed investment
funds
Deferred
financing costs, original issue debt discount, and adjustments to fair value of
debt for purchase price adjustments related to the Wendy’s Merger (see Note 3)
are amortized as interest expense over the lives of the respective debt using
the interest rate method.
See Note
9 for further information with respect to the Company’s intangible
assets.
Impairments
Goodwill
The
Company tests goodwill for impairment annually, or more frequently if events or
changes in circumstances indicate that the asset may be impaired, by comparing
the fair value of each reporting unit, using discounted cash flows or market
multiples based on earnings, to the carrying value to determine if there is an
indication that a potential impairment may exist. If we determine that an
impairment may exist, we then measure the amount of the impairment loss as the
excess, if any, of the carrying amount of the goodwill over its implied fair
value. In determining the implied fair value of the reporting unit’s goodwill,
the Company allocates the fair value
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
of a
reporting unit to all of the assets and liabilities of that unit as if the unit
had been acquired in a business combination and the fair value of the reporting
unit was the price paid to acquire the reporting unit. The excess of
the fair value of the unit over the amounts assigned to the assets and
liabilities is the implied fair value of goodwill. If the carrying amount of a
reporting unit’s goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess.
Following
the Wendy’s Merger, the Company operates in two business segments consisting of
two restaurant brands: (1) Wendy’s restaurant operations and (2) Arby’s
restaurant operations. Each segment includes Company-owned restaurants and
franchise reporting units which are considered to be separate reporting units
for purposes of measuring goodwill impairment under SFAS 142.
See Notes
9 and 18 for further disclosure related to the Company’s Goodwill
impairment.
Long-lived
assets
The
Company reviews its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. If such review indicates an asset may not be
recoverable, an impairment loss is recognized for the excess of the carrying
amount over the fair value of an asset to be held and used or over the fair
value less cost to sell of an asset to be disposed.
See Note
18 for further disclosure related to the Company’s impairment
charges.
Derivative instruments
The
Company’s derivative instruments, excluding those that may be settled in its own
stock and therefore not subject to the guidance in SFAS No. 133 “Accounting for
Derivative Instruments and Hedging Activities” (“SFAS 133”), are recorded at
fair value (the “Company’s Derivative Instruments”). Changes in fair
value of the Company’s Derivative Instruments that have been designated as cash
flow hedging instruments are included in the “Unrealized gain (loss) on cash
flow hedges” component of “Accumulated other comprehensive income (loss)” in the
accompanying Consolidated Statements of Stockholders’ Equity to the extent of
the effectiveness of such hedging instruments. Any ineffective
portion of the change in fair value of the designated hedging instruments is
included in the Consolidated Statements of Operations. Changes in
fair value of the Company’s Derivative Instruments that have not been designated
as hedging instruments are included in the Consolidated Statements of
Operations.
See Note
12 for further disclosure related to the Company’s derivative
instruments.
Share-Based
Compensation
Effective
January 2, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based
Payment” (“SFAS 123(R)”), which revised SFAS No. 123, “Accounting for
Stock-Based Compensation” (“SFAS 123”). As a result, the Company now
measures the cost of employee services received in exchange for an award of
equity instruments, including grants of employee stock options and restricted
stock, based on the fair value of the award at the date of grant. The
Company previously used the intrinsic value method. Under the intrinsic value
method, compensation cost for the Company’s stock options was measured as the
excess, if any, of the market price of the Company’s Class A common stock (the
“Class A Common Stock” or “Class A Common Shares”), and/or Class B common stock,
series 1 (the “Class B Common Stock” or “Class B Common Shares”), as applicable,
at the date of grant, or at any subsequent measurement date as a result of
certain types of modifications to the terms of its stock options, over the
amount an employee must pay to acquire the stock. The Company is using the
modified prospective application method under SFAS 123(R) and has elected not to
use retrospective application. Thus, amortization of the fair value
of all nonvested grants as of January 2, 2006, as determined under the previous
pro forma disclosure provisions of SFAS 123, except as adjusted for estimated
forfeitures, is included in the Company’s results of operations commencing
January 2, 2006. As required under SFAS 123(R), the Company reversed the
unamortized “Unearned compensation” component of “Stockholders’ equity” with an
equal offsetting reduction of “Additional paid-in capital” as of January 2, 2006
and is now recognizing compensation expense during the year determined in
accordance with SFAS 123(R) as disclosed herein with an equal offsetting
increase in “Additional paid-in capital.” Additionally, effective
with the adoption of SFAS 123(R), the Company recognizes share-based
compensation expense net of estimated forfeitures, determined based on
historical experience. Previously, forfeitures were recognized as
incurred. Under SFAS 123(R), the Company has chosen (1) the
Black-Scholes-Merton option pricing model (the “Black-Scholes Model”) for
purposes of determining the fair value of stock options granted commencing
January 2, 2006 and (2) to continue recognizing compensation costs ratably over
the requisite service period for each separately vesting portion of the
award.
As
permitted under the Financial Accounting Standards Board (the “FASB”) Staff
Position No. FAS 123(R)-3, “Transition Election Related to Accounting for the
Tax Effects of Share-Based Payment Awards,” the Company elected the specified
“short-cut” method to calculate its beginning hypothetical pool of additional
paid-in capital (the “APIC Pool”) representing excess tax
benefits
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
available
to absorb tax deficiencies, if any, recognized subsequent to the adoption of
SFAS 123(R) both determined in connection with and as of the dates of the
exercises of share-based awards. Such “short-cut” method provides a
simplified approach to calculating the APIC Pool based on the cumulative annual
net increases or decreases in excess tax benefits rather than an award-by-award
analysis since the effective date of SFAS 123 in 1995. This
accounting policy election had no effect on the Company’s consolidated financial
position or results of operations in any of the years presented since the
exercises of share-based awards in those years resulted in excess tax benefits
which could not be currently recognized.
Treasury stock
Common
stock held in treasury is stated at cost. The cost of issuances of
shares from treasury stock is determined at average cost.
Costs
of business acquisitions
Under
SFAS No. 141, “Business Combinations”, (“SFAS 141”) the Company defers any costs
incurred relating to the pursuit of business acquisitions while the potential
acquisition process is ongoing. If the acquisition is successful,
such costs are then included as a component of the purchase price of the
acquired entity. Whenever the Company decides it will no longer
pursue a potential acquisition, any related deferred costs are expensed at that
time. During December 2007, the FASB issued SFAS No. 141 (revised
2007), “Business Combinations” (“SFAS 141(R)”), which requires that, subsequent
to the adoption date of the standard, all such costs are to be expensed when
incurred. SFAS 141(R) applies prospectively to the Company’s business
combinations occurring after December 28, 2008.
Foreign currency translation
At
December 28, 2008, the Company had foreign operations in Canada as well as
in 23 foreign countries and U. S. territories. The functional currency of each
foreign subsidiary is the respective local currency. Financial statements of
foreign subsidiaries are prepared in their functional currency then translated
into United States dollars. Assets and liabilities are translated at the
exchange rate as of the balance sheet date and revenues, costs, and expenses are
translated at a monthly average exchange rate. Net gains or losses
resulting from the translation adjustment are charged or credited directly to
the “Foreign currency translation adjustment” component of “Accumulated other
comprehensive income (loss)” in the accompanying Consolidated Statements of
Stockholders’ Equity.
Income taxes
Effective
January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies how
uncertainties in income taxes should be reflected in financial statements in
accordance with SFAS 109, “Accounting for Income Taxes.” FIN 48
prescribes a recognition threshold and measurement attribute for financial
statement recognition and measurement of potential tax benefits associated with
tax positions taken or expected to be taken in income tax
returns. FIN 48 prescribes a two-step process of evaluating a tax
position, whereby an entity first determines if it is more likely than not that
a tax position will be sustained upon examination, including resolution of any
related appeals or litigation processes, based on the technical merits of the
position. A tax position that meets the more-likely-than-not
recognition threshold is then measured for purposes of financial statement
recognition as the largest amount of benefit that is greater than 50 percent
likely of being realized upon being effectively settled.
Wendy’s/Arby’s
files a consolidated Federal income tax return, which includes its principal
corporate subsidiaries. As a result of the Wendy’s Merger,
Wendy’s/Arby’s had an ownership change, as defined in the Internal Revenue Code
of 1986, as amended (the “Code”) as it became part of the Wendy’s consolidated
group as it’s new parent. As a result, Wendy’s/Arby’s had a short taxable year
in 2008 ending on the date of the Wendy’s Merger (see Note 14). The Company has
provided for Federal income taxes on the income of Deerfield through the date of
the Deerfield Sale, and the income of the Opportunities Fund and the DM Fund
through their respective effective redemption dates, net of minority interests
since, as limited liability companies (“LLC”), their income is includable in the
Federal income tax returns of its various members in proportion to their
interests in the LLC. Deferred income taxes were provided to
recognize the tax effect of temporary differences between the bases of assets
and liabilities for tax and financial statement purposes through the respective
date of sale or redemption.
Interest
accrued for FIN 48 income tax liabilities is charged to “Interest expense” in
the Company’s Consolidated Statements of Operations. Penalties
accrued for FIN 48 income tax liabilities are charged to “General and
administrative” in the Company’s Consolidated Statements of
Operations.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
Revenue recognition
“Sales”
in the Company’s Consolidated Statements of Operations includes revenues
recognized upon delivery of food to the customer, and revenues for shipments of
bakery items and kid’s meal promotional items to our franchisees and others.
“Sales” excludes sales taxes collected from the Company’s
customers.
“Franchise
revenues”, as reported in the Company’s Consolidated Statements of Operations,
include royalties, franchise fees, and rental income. Royalties from franchised
restaurants are based on a percentage of net sales of the franchised restaurant
and are recognized as earned. Initial franchise fees are recorded as
deferred income when received and are recognized as revenue when a franchised
restaurant is opened since all material services and conditions related to the
franchise fee have been substantially performed by the Company upon the
restaurant opening. Renewal franchise fees are recognized as revenue
when the license agreements are signed and the fee is paid since there are no
material services and conditions related to the renewal franchise
fee. Franchise commitment fee deposits are forfeited and recognized
as revenue upon the termination of the related commitments to open new
franchised restaurants. Rental income from locations owned by the
Company and leased to franchisees is recognized on a straight-line basis over
the respective operating lease terms.
Asset
management and related fees, which are no longer being received as a result of
the Deerfield Sale, consisted of the following types of revenues generated by
the Company in its capacity as the investment manager for various investment
funds and private investment accounts (collectively with the investments of DFR,
the “Funds”) and as the collateral manager for various CDOs: (1)
management fees, (2) incentive fees and (3) other related
fees. Management fees were recognized as revenue when the management
services had been performed for the period and sufficient cash flows had been
generated by the CDOs to pay the fees under the terms of the related management
agreements. In connection with these agreements, the Company had
subordinated receipt of certain of its management fees which were not recognized
until they were no longer subordinated. In addition, the Company
recognized non-cash management fee revenue related to its restricted stock and
stock options in DFR based on their then current fair values which were
amortized from deferred income to revenues over the vesting
period. Incentive fees were based upon the performance of the Funds
and CDOs and were recognized as revenues when the amounts became fixed and
determinable upon the close of a performance period for the Funds and all
contingencies were resolved. Contingencies may have included the
achievement of minimum CDO or Fund performance requirements specified under
certain agreements with some investors to provide minimum rate of return or
principal loss protection. Other related fees primarily included
structuring and warehousing fees earned by the Company for services provided to
CDOs and were recognized as revenues upon the rendering of such services and the
closing of the respective CDO.
Vendor
incentives
The
Company receives incentives from its vendors. These incentives are recognized as
earned and, in accordance with Emerging Issues Task Force Issue 02-16
“Accounting by a Customer (Including a Reseller) for Certain Consideration
Received from a Vendor,” are generally classified as a reduction of “Cost of
Sales” in the Consolidated Statements of Operations.
Advertising
costs
The
Company incurs various advertising costs, including contributions to certain
advertising cooperatives based upon a percentage of net sales by Company-owned
restaurants. The Company accounts for contributions made by the
Company-owned restaurants to advertising cooperatives as an expense the first
time the related advertising takes place. All advertising costs are
expensed as incurred with the exception of media development costs that are
expensed beginning in the month that the advertisement is first
communicated. These amounts are included in the “Cost of sales”
expenses in the accompanying Consolidated Statements of Operations.
See Note
29 for further information regarding Advertising costs.
Self-
insurance
We are
self-insured for most domestic workers’ compensation, health care claims,
general liability and automotive liability losses. We provide for our estimated
cost to settle both known claims and claims incurred but not yet
reported. Liabilities associated with these claims are estimated, in
part, by considering the frequency and severity of historical claims, both
specific to us as well as industry-wide loss experience, and other actuarial
assumptions. We determine casualty insurance obligations with the assistance of
actuarial firms. Since there are many estimates and assumptions involved in
recording insurance liabilities, and in the case of workers’ compensation, a
significant period of time before ultimate resolution of claims, differences
between actual future events and prior estimates and assumptions could result in
adjustments to these liabilities.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
Leases
We
operate restaurants that are located on sites owned by us and sites leased by us
from third parties. At inception, each lease is evaluated to
determine whether the lease will be accounted for as an operating or capital
lease in accordance with the provisions of Statement of Financial Accounting
Standards No. 13, Accounting for Leases ("SFAS 13") and other related
authoritative guidance under GAAP. When determining the lease term we include
option periods for which failure to renew the lease imposes an economic
detriment. The primary penalty to which we are subject is the
economic detriment associated with the existence of leasehold improvements which
might be impaired if we choose not to exercise the available renewal
options.
For
operating leases, minimum lease payments, including minimum scheduled rent
increases, are recognized as rent expense on a straight line basis
(“Straight-Line Rent”) over the applicable lease terms. Lease terms
are generally for 20 years and, in most cases, provide for rent escalations and
renewal options. The term used for Straight-Line Rent expense is
calculated from the date we obtain possession of the leased premises through the
expected lease termination date at lease inception. We expense rent from
possession date to the restaurant opening date, in accordance with FASB Staff
Position No. 13-1, “Accounting for Rental Costs Incurred during a
Construction Period” (“FSP 13-1”).
There is
a period under certain lease agreements referred to as a rent holiday (“Rent
Holiday”) that generally begins on the possession date and ends on the rent
commencement date. During the Rent Holiday period, no cash rent payments are
typically due under the terms of the lease, however, expense is recorded for
that period on a straight line basis consistent with the Straight-Line Rent
policy.
For
leases that contain rent escalations, we record the rent payable during the
lease term, as determined above, on the straight-line basis over the term of the
lease (including the rent holiday period beginning upon our possession of the
premises), and record the excess of the Straight-Line Rent over the minimum
rents paid and the as a deferred lease liability included in “Other liabilities”
in our Consolidated Balance Sheets. Certain leases contain
provisions, referred to as contingent rent (“Contingent Rent”), that require
additional rental payments based upon restaurant sales volume. Contingent rent
is expensed each period as the liability is incurred.
Favorable
and unfavorable lease amounts are recorded as components of “Other intangible
assets” and “Other liabilities”, respectively, when we purchase restaurants (see
Note 3) and are amortized to “Cost of sales” – both on a straight-line basis
over the remaining term of the leases. Upon early termination of a
lease, the favorable or unfavorable lease balance associated with the lease is
recognized as a loss or gain, respectively, in the Consolidated Statements of
Operations.
Management,
with the assistance of a valuation firm, makes certain estimates and
assumptions regarding each new lease agreement, lease renewal, and lease
amendment, including, but not limited to property values, property lives,
discount rates, and probable term, all of which can impact (i) the
classification and accounting for a lease as capital or operating, (ii) the rent
holiday and/or escalations in payment that are taken into consideration when
calculating straight-line rent and (iii) the term over which leasehold
improvements for each restaurant are amortized. These estimates and assumptions
may produce materially different amounts of depreciation and amortization,
interest and rent expense that would be reported if different assumed lease
terms were used.
Accounting
for planned major maintenance activities
Effective
January 1, 2007 the Company accounts for scheduled major aircraft maintenance
overhauls in accordance with the direct expensing method in accordance with the
provisions of FASB Staff Position No. AUG AIR-1, “Accounting for Planned Major
Maintenance Activities” (“FSP AIR-1”). Under these provisions the
actual cost of such overhauls is recognized as expense in the period it is
incurred. Previously, the Company accounted for scheduled major
maintenance activities in accordance with the accrue-in-advance method under
which the estimated cost of such overhauls was recognized as expense in the
periods through the scheduled date of the respective overhaul with any
difference between estimated and actual costs recorded in results of operations
at the time of the actual overhaul.
Materiality
of unrecorded adjustments
The
Company does not record all immaterial adjustments in its consolidated financial
statements. The Company performs a materiality analysis based on all
relevant quantitative and qualitative factors. Effective December 31,
2006 the Company quantifies the materiality of unrecorded adjustments in
accordance with Staff Accounting Bulletin 108, “Considering the Effects of Prior
Year Misstatements when Quantifying Measurements in Current Year Financial
Statements” (“SAB 108”) issued by the Securities and Exchange Commission (the
“SEC”). The impact on the current year financial statements of
recording all potential adjustments, including both the carryover and reversing
effects of amounts not recorded in prior years, are
considered. Unrecorded adjustments are quantified using a balance
sheet and an income statement approach which considers both (1) the amount of
the misstatement originating in the current year income statement (generally
referred to as the “Rollover” approach) and (2) the cumulative amount
of
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
the
misstatements at the end of the current year (generally referred to as the “Iron
Curtain” approach). Prior to December 31, 2006, the Company used only
the Rollover approach to quantify the materiality of unrecorded
adjustments.
See Note
15 for further disclosure related to the Company’s adoption of SAB 108 and
related adjustment to retained earnings as of January 2, 2006.
Recently
issued accounting pronouncements not yet adopted
In
December 2007, FASB issued SFAS 141(R) and SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements – an amendment of ARB No. 51”
(“SFAS 160”). These statements change 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. These statements are to be applied
prospectively beginning with our 2009 fiscal year. However, upon
adoption, SFAS 160 requires entities to apply the presentation and disclosure
requirements retrospectively for all periods presented. Both
standards prohibit early adoption. In addition, in April 2008, the
FASB issued FASB Staff Position No. FAS 142-3, “Determination of the Useful Life
of Intangible Assets” (“FSP FAS 142-3”). In determining the useful
life of acquired intangible assets, FSP FAS 142-3 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. FSP FAS 142-3 also requires expanded disclosure related
to the determination of intangible asset useful lives. This staff
position is effective for financial statements issued for fiscal years beginning
in our 2009 fiscal year and may impact any intangible assets we
acquire. The application of SFAS 160 will require reclassification of
our minority interests from a liability to a component of stockholders’ equity
in our consolidated financial statements beginning in our 2009 fiscal
year. The effect of this reclassification will not be material to our
consolidated balance sheet. Further, all of the statements referred
to above could have a significant impact on the accounting for any future
acquisitions starting with our 2009 fiscal year. The impact will
depend upon the nature and terms of such future acquisitions, if
any. These statements will not have an effect on our accounting for
the Wendy’s Merger except for any potential adjustments to deferred taxes
included in the allocation of the purchase price after such allocation has been
finalized.
In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities" ("SFAS 161"). SFAS 161 requires companies with
derivative instruments to disclose information that should 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 SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (“SFAS 133”) and how these items affect a company's financial
position, results of operations and cash flows. SFAS 161 affects only these
disclosures and does not change the accounting for derivatives. SFAS
161 is to be applied prospectively beginning with the first quarter of our 2009
fiscal year. However, we do not expect SFAS 161 to have a material effect on
disclosures in our consolidated financial statements.
Nature of operations
The
Company’s restaurant operations comprise two business segments: Arby’s
restaurants and Wendy’s restaurants subsequent to the Wendy’s Merger on
September 29, 2008. Prior to the Deerfield Sale on December 21, 2007, our
business operations also included an asset management segment that offered a
diverse range of fixed income and credit-related strategies to institutional
investors, including DFR.
The
Wendy’s restaurants segment is operated through franchised and Company-owned
Wendy’s quick service restaurants specializing in hamburger sandwiches. The
franchised restaurants are principally located throughout the United States and,
to a lesser extent, in 21 foreign countries and U. S. territories with the
largest number in Canada. Company-owned restaurants are located in 30 states,
with the largest number in Florida, Illinois, Ohio, Pennsylvania, Texas and
Massachusetts. Wendy’s restaurants offer an extensive menu featuring hamburgers,
filet of chicken breast sandwiches, chicken nuggets, chili, side dishes, freshly
prepared salads, soft drinks, milk, Frosty® desserts, floats and kids meals. In
addition, the restaurants sell a variety of promotional products on a limited
basis. The New Bakery Co. of Ohio, Inc. (“Bakery”), a wholly-owned subsidiary of
Wendy’s, is a producer of buns for Wendy’s restaurants, and to a lesser extent
for outside parties.
The
Arby’s restaurants segment is operated through franchised and Company-owned
Arby’s® quick service restaurants specializing in slow-roasted roast beef
sandwiches. The franchised restaurants are principally located throughout the
United States, and to a much lesser extent, in four other countries; principally
in Canada. Company-owned restaurants are located in 28 states, with
the
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
largest
number in Michigan, Ohio, Indiana, Florida, Georgia and Pennsylvania. Arby’s
restaurants offer an extensive menu of chicken, turkey and ham sandwiches, side
dishes, snacks, soft drinks and milk, including its Market Fresh® sandwiches,
salads, wraps and toasted subs.
Use
of estimates
The
preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amount of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Significant
estimates
The
Company’s significant estimates which are susceptible to change in the near term
relate to (1) estimates of impairment for the carrying values of goodwill and
long-lived assets of the restaurant businesses (see Note 18), (2) provisions of
allowance for doubtful accounts related to notes and accounts receivable,
including the DFR Notes receivable (see Note 4), (3) calculations of
self-insurance liabilities, (4) provisions for the resolution of income tax
uncertainties subject to future examinations of the Company’s Federal,
international and state income tax returns by taxing authorities, including
remaining provisions included in “Current liabilities relating to discontinued
operations,” (see Notes 14 and 23), (5) the valuation of investments and
derivatives which are not publicly traded (see Note 13), (6) provisions for the
resolution of legal and environmental matters (see Note 28), and (7) provisions
for Other Than Temporary Losses on Investments (see Note 20). Due to
uncertainties inherent in the estimation process, it is reasonably possible that
the actual resolution of any of these items could vary significantly from the
estimate and, accordingly, there can be no assurance that the estimates may not
materially change in the near term.
Certain
risk concentrations
We
believe that our vulnerability to risk concentrations in our cash equivalents is
mitigated by (1) our policies restricting the eligibility, credit quality and
concentration limits for our placements in cash equivalents and (2) insurance
from the Securities Investor Protection Corporation of up to $500,000 per
account as well as supplemental private insurance coverage maintained by
substantially all of our brokerage firms, to the extent our cash equivalents are
held in brokerage accounts. In order to partially mitigate the
exposure of our investments in our portfolio to market risk, we may employ a
hedging program which utilizes a put option on a market index. As a result of
the DFR Notes received in 2007 in connection with the Deerfield Sale (see Note
3), the Company has potential vulnerability to risk concentrations related to
interest from, and the collection of, the DFR Notes. All quarterly cash interest
payments due through December 31, 2008 on the DFR Notes have been received on a
timely basis. Based on the likelihood of the collectability of the full
principal amount of the DFR Notes, currently public available information
including public filings through the third quarter of 2008 and other factors
(see Note 4), we have recorded an allowance for collectability of $21,227 on
these notes.
We had no
customers which accounted for 10% or more of consolidated revenues in 2008, 2007
or 2006. However, through the date of the Deerfield Sale, we derived revenues
from DFR, which accounted for 22% of asset management and related fees in each
of the 2007 and 2006 years, as well as revenues from another fund, which
accounted for 10% and 16% of asset management and related fees in 2007 and 2006,
respectively. In addition, through the date of the Deerfield Sale, we
had an institutional investor whose participation in various funds managed by
the Company generated approximately 9% and 10% of asset management and related
fees in 2007 and 2006, respectively. None of the above Deerfield
revenue items in any of the periods presented represented more than 10% of
consolidated revenues.
As of
December 28, 2008, Arby’s restaurants segment has one main in-line distributor
of food, packaging and beverage products, excluding produce, breads and PepsiCo
beverage products, that services approximately 54% of Arby’s Company-owned and
franchised restaurants and three additional in-line distributors that, in the
aggregate, service approximately 33% of Arby’s Company-owned and franchised
restaurants. As of December 28, 2008, the Wendy’s restaurants segment has one
main in-line distributor of food, packaging and beverage products, excluding
produce and breads, that services approximately 62% of its Company-owned and
franchised restaurants and two additional in-line distributors that, in the
aggregate, service approximately 25% of its Company-owned and franchised
restaurants. We believe that our vulnerability to risk concentrations in
our restaurant segments related to significant vendors and sources of its raw
materials is mitigated as we believe that there are other vendors who would be
able to service our requirements. However, if a disruption of service from any
of our main in-line distributors was to occur, we could experience short-term
increases in our costs while distribution channels were adjusted.
Because
our restaurant operations are generally located throughout the United States,
and to a much lesser extent, Canada and other foreign countries and U. S.
territories, we believe the risk of geographic concentration is not
significant. Our restaurant segments could also be adversely affected
by changing consumer preferences resulting from concerns over nutritional or
safety aspects of beef,
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
poultry,
french fries or other foods or the effects of food-borne illnesses. Our exposure
to foreign exchange risk is primarily related to fluctuations in the Canadian
dollar relative to the U.S. dollar for Canadian operations in the Wendy’s
restaurant segment. However, our exposure to Canadian dollar foreign currency
risk is mitigated by the fact that less than 10% of our restaurants are in
Canada.
Merger
with Wendy’s International, Inc.
On
September 29, 2008, we completed the Wendy’s Merger in an all-stock transaction
in which Wendy’s shareholders received a fixed ratio of 4.25 shares of
Wendy’s/Arby’s Class A Common Stock for each share of Wendy’s common stock
owned. We expect that the merger will better position the Company to
deliver long-term value to our stockholders through an expanded platform for
growth for both brands with more combined resources, enhanced operational
efficiencies, improved product offerings, and shared services. At September 28,
2008, there were 6,625 Wendy’s restaurants in operation in the United States and
in 21 other countries and U. S. territories. Of these restaurants, 1,404 were
operated by Wendy’s and 5,221 by Wendy’s franchisees.
The
merger is being accounted for using the purchase method of accounting in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141,
Business Combinations. In accordance with this standard, we have
concluded that Wendy’s/Arby’s is the acquirer for financial accounting
purposes. The total merger consideration has been allocated to
Wendy’s net tangible and intangible assets acquired and liabilities assumed
based on their estimated fair values with the excess recognized as
goodwill. Wendy’s operating results have been included in our
consolidated financial statements beginning on the merger date.
In
accordance with the purchase method of accounting, management, with the
assistance of a valuation firm, has preliminarily allocated the total merger
consideration to Wendy’s net tangible and intangible assets acquired and
liabilities assumed based on their estimated fair values as of September 28,
2008 with the excess, $845,631, recognized as goodwill of the Wendy’s
restaurants segment, of which $42,282 is deductible for income tax
purposes. The acquired franchise agreements have a weighted average
amortization period of approximately 21 years and the acquired trademark has an
indefinite life so there is no related amortization. The acquired favorable and
unfavorable leases have a weighted average amortization period of approximately
19 and 16 years, respectively. The fair value of these assets and
liabilities included in the table below is preliminary, and is subject to
change. A change in the merger consideration allocated to depreciable
or amortizable assets may result in increased future depreciation and/or
amortization expense.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
The
preliminary computation of the total estimated merger consideration, the
allocation of the consideration to the assets acquired and liabilities assumed,
the excess of the merger consideration over the book values of the assets
acquired and liabilities assumed, and the resulting adjustment to goodwill are
as follows:
Value
of shares of Wendy’s/Arby’s common stock issued in exchange for Wendy’s
common shares
|
|
$ |
2,476,197 |
|
Value
of Wendy’s stock options that have been converted into Wendy’s/Arby’s
options
|
|
|
18,495 |
|
Estimated
Wendy’s Merger costs
|
|
|
20,703 |
|
Total
estimated merger consideration
|
|
|
2,515,395 |
|
|
|
|
|
|
Net
book value of Wendy’s assets acquired and liabilities
assumed
|
|
|
796,588 |
|
Less: Wendy’s
historical goodwill acquired
|
|
|
(83,794 |
) |
Net
book value of Wendy’s assets acquired and liabilities
assumed
|
|
|
712,794 |
|
Excess
of merger consideration over book value of Wendy’s assets acquired and
liabilities assumed
|
|
|
1,802,601 |
|
Change
in fair values of assets and liabilities allocated to:
|
|
|
|
|
(Increase)/decrease
in:
|
|
|
|
|
Current
assets
|
|
|
|
|
Accounts
and notes receivable
|
|
|
(694 |
) |
Prepaid
expenses and other current assets
|
|
|
985 |
|
Investments
|
|
|
(64,169 |
) |
Properties
|
|
|
(44,918 |
) |
Other
intangible assets
|
|
|
|
|
Trademark
|
|
|
(900,109 |
) |
Franchise
agreements
|
|
|
(353,000 |
) |
Favorable
leases
|
|
|
(117,268 |
) |
Computer
software
|
|
|
9,566 |
|
Deferred
costs and other assets
|
|
|
(377 |
) |
Increase/(decrease)
in:
|
|
|
|
|
Accrued
expenses and other current liabilities
|
|
|
5,541 |
|
Long-term
debt, including current portion of $228
|
|
|
(56,337 |
) |
Other
liabilities
|
|
|
(46,574 |
) |
Unfavorable
leases
|
|
|
64,053 |
|
Deferred
income tax liability
|
|
|
546,331 |
|
Total adjustments
|
|
|
(956,970 |
) |
Total
goodwill
|
|
$ |
845,631 |
|
In the
Wendy’s Merger, 376,776 shares of Wendy’s/Arby’s common stock were issued to
Wendy’s shareholders. The equity consideration is based on the 4.25
conversion factor of the Wendy’s outstanding shares at a value of $6.57 per
share which represents the average closing market price of Class A Common Stock
two days before and after the merger announcement date of April 24,
2008. Wendy’s shareholders held approximately 80%, in the aggregate,
of the outstanding Wendy’s/Arby’s common stock immediately following the
merger. In addition, immediately prior to the Wendy’s Merger, our
Class B Common Stock was converted into Class A Common Stock on a one for one
basis (the "Conversion”).
Outstanding
Wendy’s stock options were converted upon completion of the merger into stock
options with respect to Wendy’s/Arby’s common stock, based on the 4.25:1
exchange ratio. The value of Wendy’s stock options that have been
converted into Wendy’s/Arby’s stock options of $18,495 was calculated using the
Black-Scholes option pricing model as of April 24, 2008.
Pro
Forma Operating Data (Unaudited)
The
following unaudited supplemental pro forma consolidated summary operating data
(the “As Adjusted”) for 2008 and 2007 has been prepared by adjusting the
historical data as set forth in the accompanying consolidated statements of
operations for the years ended December 28, 2008 and December 30, 2007 to give
effect to the Wendy’s Merger and the Conversion as if they had been consummated
as of the beginning of each fiscal year:
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
|
|
2008
|
|
|
2007
|
|
|
|
As
Reported
|
|
|
As
Adjusted
|
|
|
As
Reported
|
|
|
As
Adjusted
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
1,662,291 |
|
|
$ |
3,279,504 |
|
|
$ |
1,113,436 |
|
|
$ |
3,273,461 |
|
Franchise
revenues
|
|
|
160,470 |
|
|
|
383,551 |
|
|
|
86,981 |
|
|
|
374,950 |
|
Asset
management and related fees
|
|
|
- |
|
|
|
- |
|
|
|
63,300 |
|
|
|
- |
|
Total
revenues
|
|
|
1,822,761 |
|
|
|
3,663,055 |
|
|
|
1,263,717 |
|
|
|
3,648,411 |
|
Operating
(loss) profit
|
|
|
(413,650 |
) |
|
|
(366,982 |
) |
|
|
19,900 |
|
|
|
150,437 |
|
Net
(loss) income
|
|
|
(479,741 |
) |
|
|
(475,985 |
) |
|
|
16,081 |
|
|
|
80,856 |
|
Basic
and diluted (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
A Common Stock:
|
|
|
(3.05 |
) |
|
|
(1.01 |
) |
|
|
.16 |
|
|
|
.17 |
|
Class
B Common Stock:
|
|
|
(1.24 |
) |
|
|
- |
|
|
|
.18 |
|
|
|
- |
|
This
unaudited pro forma information is provided for informational purposes only and
does not purport to be indicative of the results of operations that would have
occurred if the merger had been completed on the dates set forth above, nor is
it necessarily indicative of the future operating results of the combined
company. The As Reported and As Adjusted amounts for Wendy’s include
(1) the effect of $84,231 of Special Committee costs incurred before the date of
the Wendy’s Merger in 2008 and $24,670 in 2007, (2) $49,757 of facilities
relocation costs in 2007, and (3) $6,750 of impairment of other long-lived
assets in 2007. The As Adjusted income (loss) per share data for 2008 and 2007
assume the conversion of all Class B Common Stock to Class A Common Stock
occurred prior to 2007 and the As Adjusted data for 2007 excludes
Deerfield.
Other
Restaurant Acquisitions
2008
The
Company completed the acquisitions of the operating assets, net of liabilities
assumed, of 45 Arby’s franchised restaurants, including 41 restaurants in the
California market, in two separate transactions during fiscal
2008. The total consideration, before post-closing adjustments, for
the acquisitions was $15,891 consisting of (1) $8,934 of cash (before
consideration of $45 of cash acquired), (2) the assumption of $6,239 of debt and
(3) $718 of related expenses. The aggregate purchase price of $16,378
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 expense, net” in the accompanying consolidated statement of
operations. Further, we paid an additional $15 during 2008 for a
finalized post-closing purchase price adjustment related to other restaurant
acquisitions in 2007 and reduced the amount of goodwill recognized related to
the acquisition in 2005 of RTM Restaurant Group (the “RTM Acquisition”) by
$385 primarily due to a change in the allocation of certain assets and the
tax basis of the assets acquired.
2007
The
Company completed the acquisitions of the operating assets, net of liabilities
assumed, of 12 Arby’s franchised restaurants in seven separate transactions
during the year ended December 30, 2007. The total estimated
consideration for the acquisitions was $4,142 consisting of (1) $3,000 of cash
(before consideration of $12 of cash acquired), (2) the assumption of $700 of
debt and (3) $442 of related estimated expenses. The total
consideration for the acquisitions represents $316 for the aggregate settlement
loss from unfavorable franchise rights on the termination of a sublease, and
$3,826 for the aggregate purchase prices. The Company paid an
additional $10 in 2007 related to the other restaurant acquisitions in 2006
principally related to finalizing a post-closing purchase price
adjustment. Additionally, the Company recorded purchase adjustments
related to its acquisition of RTM, including a payment of $1,600 related to a
post-closing purchase price adjustment and a reduction of goodwill recognized of
$2,064 due to an increase in deferred income taxes from a change in the estimate
of tax basis of the net assets acquired.
2006
The
Company completed the acquisitions of the operating assets, net of liabilities
assumed, of 13 Arby’s franchised restaurants in five separate transactions
during the year ended December 31, 2006. The total consideration for
the acquisitions was $5,407 consisting of (1) $3,471 of cash (including $10 paid
in 2007 and before consideration of $11 of cash acquired), (2) the assumption of
$1,808 of debt and (3) $128 of related expenses. The total
consideration for the acquisitions represents the aggregate $887 for the
settlement loss from unfavorable franchise rights and $4,520 for the aggregate
purchase prices. Additional adjustments included a $5,426
increase to goodwill related to its acquisition of RTM, primarily as a result of
adjustments to the estimated acquisition costs, and revisions to preliminary
estimated fair values of both assets acquired and liabilities assumed, and $195
in payments to finalize post-closing purchase
price adjustments related to other restaurant acquisitions in
2005.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
Due to
the relative insignificance of these other restaurant acquisitions, disclosures
of pro forma operating data and purchase price allocations have not been
presented.
Sale
of Deerfield
On
December 21, 2007, the Company sold its 63.6% capital interest in Deerfield, the
Company’s former asset management business (the “Deerfield Sale”), to DFR. The
completion of the Deerfield Sale was the primary aspect in Triarc’s corporate
restructuring (Note 27). The Deerfield Sale resulted in non-cash proceeds to the
Company aggregating approximately $134,608 consisting of (1) 9,629 preferred
shares (the “Preferred Stock”) of a subsidiary of DFR with a then estimated fair
value of $88,398 at the time of the Deerfield sale and (2) $47,986 principal
amount of series A Senior Secured Notes of DFR due in December 2012 with an
estimated fair value of $46,210 (see Note 4) at the date of the Deerfield
Sale.
The
Deerfield Sale resulted in an approximate pretax gain of $40,193, net of
approximately $2,320 of related fees and expenses and net of the then remaining
$6,945 unrecognized gain on the sale which could not be recognized due to the
Company’s then continuing interest in DFR, as further described below, and is
included in “Gain on sale of consolidated businesses” in the accompanying
Consolidated Statements of Operations. The gain at the date of sale excluded
approximately $7,651 that the Company could not recognize because of its then
approximate 16% continuing interest in DFR through its ownership in the
Preferred Shares, on an as-if converted basis, and common stock of DFR it
already owned. As a result of a subsequent distribution of 1,000 DFR
shares previously owned by the Company in 2007 (see Note 8 and Note 27), our
ownership decreased to approximately 15% and the Company recognized
approximately $706 of the originally deferred gain. The fees and expenses
include approximately $825 representing a portion of the additional fees which
are attributable to the Company’s utilization of Management Company personnel in
connection with the provision of services under the Services Agreement as
further described in the Transactions with Related Parties footnote (see Note
27).
The
Preferred Stock had a mandatory redemption feature in December 2014 and had
cumulative dividend rights equal to the greater of 5% of the $10.00 liquidation
preference or the per share common stock dividend declared by DFR. The DFR
Preferred Shares were accounted for as an available-for-sale debt security due
to their mandatory redemption requirement and were included, net of the $6,945
unrecognized gain, in “Investments” in the accompanying consolidated balance
sheet as of December 30, 2007 (see Note 8).
There is
no minority interest expense as a result of the Deerfield sale as a result of
the terms of equity arrangement of the Deerfield Equity Interest. The pro forma
operating results for 2007 from the date of the Deerfield Sale through the end
of 2007 are not material and have not been presented.
In
December 2007, pursuant to agreements with certain former executives (see Note
28), the Company distributed its original investment in the 1,000 shares of
common stock of DFR to the former executives. In connection with this
distribution, the Company realized a $2,872 loss on its investment in DFR common
shares which is included in “Other income (expense), net” (See Note
22).
On March
11, 2008, DFR stockholders approved the one-for-one conversion of all its
outstanding convertible preferred stock into DFR common stock which converted
the 9,629 preferred shares we held into a like number of shares of common stock.
On March 11, 2008, our Board of Directors approved the distribution of our 9,835
shares of DFR common stock, which also included the 206 common shares of DFR
distributed to us in connection with the Deerfield Sale which were our portion
of the DFR restricted and incentive fee shares (see Note 8), to our
stockholders. The distribution in the form of a dividend, which was valued at
$14,464, was paid on April 4, 2008 to holders of record of our Class A
Common Stock and our Class B Common Stock on March 29,
2008.
In March
2008, in response to unanticipated credit and liquidity events in the first
quarter of 2008, DFR announced that it was repositioning its investment
portfolio to focus on agency-only residential mortgage-backed securities and
away from its principal investing segment to its asset management segment with
its fee-based revenue streams. In addition, it stated that during the
first quarter of 2008, its portfolio was adversely impacted by deterioration of
the global credit markets and, as a result, it sold $2,800,000 of its agency and
$1,300,000 of its AAA-rated non-agency mortgage-backed securities and reduced
the net notional amount of interest rate swaps used to hedge a portion of its
mortgage-backed securities by $4,200,000, all at a net after-tax loss of
$294,300 to DFR.
Based on
the events described above and their negative effect on the market price of DFR
common stock, we concluded that the fair value and, therefore, the carrying
value of our investment in the 9,629 common shares owned by us, as well as the
206 common shares which were distributed to us in connection with the Deerfield
Sale, was impaired. As a result, as of March 11, 2008 we recorded an
other than temporary loss which is included in “Other than temporary losses on
investments” in the accompanying consolidated statements of operations for the
year ended December 28, 2008 of $67,594 (without tax benefit as described below)
which included
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
$11,074
of pre-tax unrealized holding losses previously recorded as of December 30, 2007
and which were included in “Accumulated other comprehensive income (loss)”, a
component of stockholder’s equity in the accompanying 2007 Consolidated Balance
Sheet. These common shares were considered available-for-sale securities
due to the limited period they were to be held as of March 11, 2008 (the
“Determination Date”) before the dividend distribution of the shares to our
stockholders. We also recorded an additional impairment charge, which
is also included in “Other than temporary loses on investments” from March 11,
2008 through the March 29, 2008 record date of the dividend of $492. As a result
of the distribution, the income tax loss that resulted from the decline in value
of our investment of $68,086 is not deductible for income tax purposes and no
income tax benefit was recorded related to this loss.
Additionally,
from December 31, 2007 through the Determination Date, we recorded approximately
$754 of equity in net losses of DFR which are included in “Other income
(expense), net” in the accompanying consolidated statements of operations for
the year ended December 28, 2008 related to our investment in the 206 common
shares of DFR discussed above which were accounted for under the equity method
through the Determination Date.
On
December 21, 2007, as described in Note 3, the Company received, as a part of
the proceeds in the Deerfield sale, $47,986 principal amount of series A senior
secured notes of a subsidiary of DFR due in December 2012 (the “DFR Notes”) with
an estimated fair value of $46,210 at the date of the Deerfield
Sale. The fair value of the DFR Notes was based on the present value
of the probability weighted average of expected cash flows from the DFR
Notes. The Company believed that this value approximated the fair
value of the DFR Notes as of December 27, 2007 due to the close proximity to the
Deerfield Sale date.
The DFR
Notes bear interest at the three-month London InterBank Offered Rate (“LIBOR”)
(1.47% at December 28, 2008) plus a factor, initially 5% through December 31,
2009, increasing 0.5% each quarter from January 1, 2010 through June 30, 2011
and 0.25% each quarter from July 1, 2011 through their maturity. The
DFR Notes are secured by certain equity interests of DFR and certain of its
subsidiaries. The $1,776 original imputed discount on the DFR Notes
is being accreted to “Other income (expense), net” in the accompanying
consolidated statements of operations using the interest rate
method.
We have
received timely cash payment of all four quarterly interest payments due on the
DFR Notes to date. Additionally, in October 2008 we received a $1,070
dividend payment on the convertible preferred stock which we previously
held. Based on the Deerfield Sale agreement, payment of a dividend by
DFR on this preferred stock was dependent on DFR’s board of directors declaring
and paying a dividend on DFR’s common stock. The first dividend to be
declared on their common stock following the date of the Deerfield Sale was
declared by DFR and recognized by us in our 2008 third quarter and paid in
October 2008. Certain expenses totaling $6,201 related to the
Deerfield Sale, which were a liability of the Company and for which we had an
equal offsetting receivable from DFR as of December 30, 2007, were paid by DFR
during the first half of 2008. Accordingly, we did not record
valuation reserves on these notes prior to the fourth quarter of
2008.
The dislocation in the
sub-prime mortgage sector and continuing weakness in the broader credit markets
has adversely impacted, and may continue to adversely impact, DFR’s cash
flows. Due to the significant continuing weakness in the
credit markets and at DFR and based upon current publicly available information,
and our ongoing
assessment of the likelihood of full repayment of the principal amount of the
DFR Notes, Company management determined that the likelihood of
collectability of the full principal amount of the DFR Notes had significantly
declined and the Company recorded an allowance for doubtful accounts on the DFR
Notes of $21,227 as of December 28, 2008. This charge is included in
“Other than temporary losses on investments” in our Consolidated Statements of
Operations (see Note 20).
The DFR Notes, net of
unamortized discount and the valuation allowance at December 28, 2008, of
$25,344 and $46,219 at December 28, 2008 and December 27, 2007, respectively,
are included in “Non-current notes receivable” in the accompanying Consolidated
Balance Sheets (Note 7).
Basic income
(loss) per share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding. In connection with the
Wendy’s Merger, Wendy’s/Arby’s stockholders approved a charter amendment to
convert each of the then existing Triarc Class B Common Stock into one share of
Wendy’s/Arby’s Class A Common Stock (the “Conversion”).
Basic income
(loss) per share has been computed by dividing the allocated income or loss for
the Company’s Class A Common Stock and the Company’s Class B Common Stock by the
weighted average number of shares of each class. Both factors, as
appropriate, are presented in the tables below. Net loss for 2006 was allocated
equally among each share of Class A Common Stock and Class B Common Stock,
resulting in the same loss per share for each class. Net income for 2007
was allocated between the Class
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
A Common
Stock and Class B Common Stock based on the actual dividend payment ratio. Net
loss for 2008 was allocated equally among each share of Class A Common Stock and
Class B Common Stock up until the date of the Conversion; subsequent to the
Conversion, net loss was only allocated to Class A Common Stock since Class B
Common Stock no longer existed.
Diluted
loss per share for 2008 and 2006 was the same as basic loss per share for each
share since the Company reported a loss from continuing operations and,
therefore, the effect of all potentially dilutive securities on the loss from
continuing operations per share would have been antidilutive. Diluted
income per share for 2007 has been computed by dividing the allocated income for
the Class A Common Stock and Class B Common Stock by the weighted average number
of shares of each class plus the potential common share effect on each class of
dilutive stock options and of Class B restricted shares, computed using the
treasury stock method, as presented in the table that follows. The
shares used to calculate diluted income per share exclude any effect of the
Company’s 5% convertible notes due 2023 (the “Convertible Notes”) which would
have been antidilutive since the after-tax interest on the Convertible Notes per
share obtainable on conversion exceeded the reported basic income from
continuing operations per share (see Note 10).
As
disclosed in Note 10, during 2006 an aggregate of $172,900 of the Convertible
Notes were converted or effectively converted into 4,323 and 8,645 shares of the
Company’s Class A Common Stock and Class B Common Stock,
respectively. The weighted average effect of these shares is included
in the basic income or (loss) per share calculation from the dates of their
issuance.
The only
Company securities as of December 28, 2008 that could dilute basic income per
share for years subsequent to December 28, 2008 are (1) outstanding stock
options which can be exercised into 26,723 shares of the Company’s Class A
Common Stock (see Note 16), (2) 413 restricted shares of the Company’s Class A
Common Stock which principally vest over three years (see Note 16) and (3)
$2,100 of Convertible Notes which are convertible into 160 shares of the
Company’s common stock (see Note 10).
Income
(loss) per share has been computed by allocating the income or loss as
follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Class
A Common Stock:
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(421,599 |
) |
|
$ |
4,337 |
|
|
$ |
(3,404 |
) |
Discontinued
operations
|
|
|
1,378 |
|
|
|
286 |
|
|
|
(41 |
) |
Net
(loss) income
|
|
$ |
(420,221 |
) |
|
$ |
4,623 |
|
|
$ |
(3,445 |
) |
Class
B Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(60,359 |
) |
|
$ |
10,749 |
|
|
$ |
(7,399 |
) |
Discontinued
operations
|
|
|
839 |
|
|
|
709 |
|
|
|
(88 |
) |
Net
(loss) income
|
|
$ |
(59,520 |
) |
|
$ |
11,458 |
|
|
$ |
(7,487 |
) |
The
number of shares used to calculate basic and diluted (loss) income per share
were as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Class
A Common Stock:
|
|
|
|
|
|
|
|
|
|
Basic
shares – weighted average shares
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
137,669 |
|
|
|
28,836 |
|
|
|
27,301 |
|
Dilutive
effect of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
and
restricted shares
|
|
|
- |
|
|
|
129 |
|
|
|
- |
|
Diluted
shares
|
|
|
137,669 |
|
|
|
28,965 |
|
|
|
27,301 |
|
Class
B Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
shares – weighted average shares
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
47,965 |
(a) |
|
|
63,523 |
|
|
|
59,343 |
|
Dilutive
effect of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
and
restricted shares
|
|
|
- |
|
|
|
759 |
|
|
|
- |
|
Diluted
shares
|
|
|
47,965 |
|
|
|
64,282 |
|
|
|
59,343 |
|
_____________
(a)
Represents the weighted average for the full year even though the Class B Common
Stock was converted into Class A Common Stock on September 29,
2008.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
Short-Term
Investments
The
Company’s short-term investments, included in “Prepaid expenses and other
current assets” in the accompanying Consolidated Balance Sheets, are carried at
fair market value and at December 28, 2008 and December 30, 2007 consist
entirely of available-for-sale securities. The cost of these
securities has been reduced by any Other Than Temporary Losses (see Note
20). Information regarding the Company’s short-term investments at
December 28, 2008 and December 30, 2007 is as follows:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Unrealized
Holding
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
Holding
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
Available-for-sale
securities
|
|
$ |
162 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
162 |
|
|
$ |
162 |
|
|
$ |
685 |
|
|
$ |
1,923 |
|
|
$ |
- |
|
|
$ |
2,608 |
|
|
$ |
2,608 |
|
Proceeds
from sales and investment distribution values (see Note 27) of current and
non-current available-for-sale securities, and gross realized gains and gross
realized losses on those transactions, which are included in “Investment income,
net” in the accompanying consolidated statements of operations (see
Note 19), are as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Proceeds
from sales and investment distribution values
|
|
$ |
87,301 |
|
|
$ |
105,170 |
|
|
$ |
116,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
realized gains
|
|
$ |
4,222 |
|
|
$ |
21,691 |
|
|
$ |
7,664 |
|
Gross
realized losses
|
|
|
(5,809 |
) |
|
|
(682 |
) |
|
|
(401 |
) |
|
|
$ |
(1,587 |
) |
|
$ |
21,009 |
|
|
$ |
7,263 |
|
The
following is a summary of the components of the net change in unrealized gains
and losses on available-for-sale securities included in other comprehensive
income (loss):
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Unrealized
holding (losses) gains arising during the year
|
|
$ |
(4,505 |
) |
|
$ |
(9,842 |
) |
|
$ |
13,012 |
|
Reclassifications
of prior year unrealized holding (losses) gains into net
income
or loss
|
|
|
8,206 |
|
|
|
(15,811 |
) |
|
|
34 |
|
Equity
in change in unrealized holding (losses) gains arising during the
year
|
|
|
(201 |
) |
|
|
2,170 |
|
|
|
242 |
|
|
|
|
3,500 |
|
|
|
(23,483 |
) |
|
|
13,288 |
|
Income
tax benefit (provision)
|
|
|
(1,288 |
) |
|
|
8,723 |
|
|
|
(5,048 |
) |
Minority
interests in (increase) decrease in unrealized holding gains of a
consolidated subsidiary
|
|
|
- |
|
|
|
(697 |
) |
|
|
737 |
|
|
|
$ |
2,212 |
|
|
$ |
(15,457 |
) |
|
$ |
8,977 |
|
As of
December 28, 2008, we had unrealized holding gains and (losses) on
available-for-sale marketable securities before income taxes and minority
interests of $410 and ($242), respectively, included in “Accumulated other
comprehensive loss.” We evaluated the unrealized losses to determine
whether these losses were other than temporary and concluded that they were
not. Should either (1) we decide to sell any of these investments
with unrealized losses or (2) any of the unrealized losses continue such that we
believe they have become other than temporary, we would recognize the losses on
the related investments at that time.
The
change in the net unrealized (loss) gain on trading securities and trading
derivatives resulted in gains of $172 and $5,332 in 2007 and 2006, respectively,
which are included in “Investment income, net” in the accompanying Consolidated
Statements of Operations (see Note 19).
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
Cash
and cash equivalents
|
|
Year
End
|
|
|
|
2008
|
|
|
2007
|
|
Cash
|
|
$ |
53,324 |
|
|
$ |
17,650 |
|
Cash
equivalents
|
|
|
36,766 |
|
|
|
60,466 |
|
|
|
$ |
90,090 |
|
|
$ |
78,116 |
|
Restricted
cash equivalents
|
|
Year-End
|
|
Current
|
|
2008
|
|
Trust
for termination costs for former Wendy’s executives (Note
27)
|
|
$ |
20,792 |
|
|
|
Year End
|
|
Non-current
|
|
2008
|
|
|
2007
|
|
Accounts
managed by the Management Company (Notes 8
and 27)
|
|
$ |
26,515 |
|
|
$ |
43,356 |
|
Trust
for termination costs for former Wendy’s executives (Note
27)
|
|
|
6,462 |
|
|
|
- |
|
Collateral
supporting letters of credit securing payments due under
leases
|
|
|
1,055 |
|
|
|
1,939 |
|
|
|
$ |
34,032 |
|
|
$ |
45,295 |
|
Accounts
and notes receivable
|
|
Year
End
|
|
Current
|
|
2008
|
|
|
2007
|
|
Accounts
receivable:
|
|
|
|
|
|
|
Franchisees
|
|
$ |
68,895 |
|
|
$ |
14,266 |
|
Deerfield
Sale expenses reimbursable from DFR (Note 3)
|
|
|
- |
|
|
|
6,216 |
|
Other
related parties (Note 27)
|
|
|
260 |
|
|
|
607 |
|
Other
|
|
|
25,543 |
|
|
|
6,209 |
|
|
|
|
94,698 |
|
|
|
27,298 |
|
Notes
receivable:
|
|
|
|
|
|
|
|
|
Franchisees
|
|
|
3,447 |
|
|
|
478 |
|
|
|
|
98,145 |
|
|
|
27,776 |
|
Allowance
for doubtful accounts
|
|
|
(887 |
) |
|
|
(166 |
) |
|
|
$ |
97,258 |
|
|
$ |
27,610 |
|
|
|
Year End
|
|
Non-Current
|
|
2008
|
|
|
2007
|
|
Notes
receivable:
|
|
|
|
|
|
|
DFR
|
|
$ |
46,571 |
|
|
$ |
46,219 |
|
Franchisees
|
|
|
9,841 |
|
|
|
564 |
|
|
|
|
56,412 |
|
|
|
46,783 |
|
Allowance
for doubtful accounts
|
|
|
(21,804 |
) |
|
|
(354 |
) |
|
|
$ |
34,608 |
|
|
$ |
46,429 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
The
following is an analysis of the allowance for doubtful accounts which relates
primarily to the DFR notes and to trade accounts and notes
receivables:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Balance
at beginning of year:
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
166 |
|
|
$ |
224 |
|
|
$ |
591 |
|
Non-current
|
|
|
354 |
|
|
|
- |
|
|
|
- |
|
Provision
for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
DFR
notes
|
|
|
21,227 |
|
|
|
- |
|
|
|
- |
|
Franchisees
|
|
|
783 |
|
|
|
277 |
|
|
|
172 |
|
Other
|
|
|
(113 |
) |
|
|
354 |
|
|
|
- |
|
Uncollectible
accounts written off, net of recoveries
|
|
|
274 |
|
|
|
(335 |
) |
|
|
(117 |
) |
Uncollectible
related party notes written off
|
|
|
- |
|
|
|
- |
|
|
|
(422 |
) |
Balance
at end of year:
Current
|
|
|
887 |
|
|
|
166 |
|
|
|
224 |
|
Non-current
|
|
|
21,804 |
|
|
|
354 |
|
|
|
- |
|
Total
|
|
$ |
22,691 |
|
|
$ |
520 |
|
|
$ |
224 |
|
Properties
|
|
Year
End
|
|
|
|
2008
|
|
|
2007
|
|
Owned:
|
|
|
|
|
|
|
Land
|
|
$ |
460,588 |
|
|
$ |
72,439 |
|
Buildings
and improvements
|
|
|
682,280 |
|
|
|
56,638 |
|
Office,
restaurant and transportation equipment
|
|
|
388,966 |
|
|
|
227,329 |
|
Leasehold
improvements
|
|
|
171,569 |
|
|
|
103,297 |
|
Leased
(a):
|
|
|
|
|
|
|
|
|
Capitalized
leases
|
|
|
127,728 |
|
|
|
74,928 |
|
Sale-leaseback
assets
|
|
|
146,122 |
|
|
|
129,024 |
|
|
|
|
1,977,253 |
|
|
|
663,655 |
|
Accumulated
depreciation and amortization
|
|
|
(206,881 |
) |
|
|
(158,781 |
) |
|
|
$ |
1,770,372 |
|
|
$ |
504,874 |
|
|
(a)These
assets principally include buildings and
improvements.
|
Deferred
costs and other assets
|
|
Year
End
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Deferred
financing costs (a)
|
|
$ |
20,645 |
|
|
$ |
23,982 |
|
Deferred
costs of business acquisition (b)
|
|
|
- |
|
|
|
7,656 |
|
Non-current
finance sublease receivable, net of non-guaranteed residual and interest
of $11,528
|
|
|
10,574 |
|
|
|
- |
|
Non-current
prepaid rent
|
|
|
4,462 |
|
|
|
4,720 |
|
Other
|
|
|
7,027 |
|
|
|
2,834 |
|
|
|
|
42,708 |
|
|
|
39,192 |
|
Accumulated
amortization
|
|
|
(15,238 |
) |
|
|
(11,532 |
) |
|
|
$ |
27,470 |
|
|
$ |
27,660 |
|
______________________________
(a) Includes
$4,060 of deferred costs related to potential future financings as of December
30, 2007 which was written off in 2008.
(b) Represents
deferred costs related to the Wendy’s Merger as of December 30, 2007 (see Note
3).
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
Pledged
assets
The
following is a summary of assets pledged as collateral for certain debt (see
Note 10):
|
|
Year
End
|
|
|
|
2008
|
|
|
2007
|
|
Cash
and cash equivalents
|
|
$ |
19,853 |
|
|
$ |
44,055 |
|
Accounts
and notes receivable, net
|
|
|
17,482 |
|
|
|
18,051 |
|
Inventories
|
|
|
11,096 |
|
|
|
11,067 |
|
Properties,
net
|
|
|
335,739 |
|
|
|
292,021 |
|
Other
intangible assets
|
|
|
22,299 |
|
|
|
23,617 |
|
Deferred
costs and other assets
|
|
|
2,571 |
|
|
|
2,281 |
|
|
|
$ |
409,040 |
|
|
$ |
391,092 |
|
See Note
10 regarding collateral for our amended and restated credit agreement which was
executed in March 2009. The Arby’s
Credit Agreement was amended and restated as of March 11, 2009 and Wendy’s and
certain of its affiliates in addition to ARG and certain of its affiliates
became parties. Wendy’s, ARG and other certain other subsidiaries are the
co-borrowers (the “Co-Borrowers”) under the amended and restated Credit
Agreement. Under the amended and restated Credit Agreement substantially
all of the assets of the Co-Borrowers (other than real property, except for
mortgages on certain Wendy’s real properties), the stock of Wendy's and ARG and
certain of their domestic subsidiaries and 65% of the stock of certain of their
foreign subsidiaries (all subject to certain exclusions) are pledged as
collateral security, and the Co-Borrowers’ obligations are also guaranteed by
substantially all of the domestic entities comprising the Wendy’s and Arby’s
restaurant segments (all subject to certain limitations and
exclusions).
Accounts
payable
|
|
Year
End
|
|
|
|
2008
|
|
|
2007
|
|
Trade
|
|
$ |
125,020 |
|
|
$ |
51,769 |
|
Other
|
|
|
14,320 |
|
|
|
2,528 |
|
|
|
$ |
139,340 |
|
|
$ |
54,297 |
|
Accrued
expenses and other current liabilities
|
|
Year End
|
|
|
|
2008
|
|
|
2007
|
|
Casualty
insurance reserves
|
|
$ |
66,917 |
|
|
$ |
8,764 |
|
Accrued
compensation and related benefits
|
|
|
65,262 |
|
|
|
43,038 |
|
Accrued
taxes
|
|
|
42,753 |
|
|
|
15,917 |
|
Liability
for former Wendy’s executives (Note 27)
|
|
|
19,710 |
|
|
|
- |
|
Accrued
interest
|
|
|
9,776 |
|
|
|
6,056 |
|
Accrued
facilities relocation and corporate restructuring (Note
17)
|
|
|
1,033 |
|
|
|
12,799 |
|
Other
|
|
|
41,883 |
|
|
|
31,211 |
|
|
|
$ |
247,334 |
|
|
$ |
117,785 |
|
|
|
Year
End
|
|
|
|
2008
|
|
|
2007
|
|
Unfavorable
operating lease liability
|
|
$ |
96,407 |
|
|
$ |
37,604 |
|
Accrued
federal and state income tax contingencies
|
|
|
23,646 |
|
|
|
15,012 |
|
Straight-line
rent accrual
|
|
|
21,833 |
|
|
|
14,512 |
|
Investment
related liabilities (see Note 8)
|
|
|
19,605 |
|
|
|
310 |
|
Supplemental
retirement plan liability for former Wendy’s executives (Note
27)
|
|
|
7,016 |
|
|
|
- |
|
Minority
interests in consolidated subsidiaries (a)
|
|
|
154 |
|
|
|
958 |
|
Other
|
|
|
17,926 |
|
|
|
7,742 |
|
|
|
$ |
186,587 |
|
|
$ |
76,138 |
|
|
(a)
The minority interests set forth above are comprised principally of
interests held by the Company’s former executives and other former
officers (see Notes 16 and 27).
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
Non-Current
Investments
The
following is a summary of the carrying value of investments classified as
non-current:
|
|
|
|
|
Year
End 2008
|
|
|
Year
End 2007
|
|
|
|
|
|
|
|
|
|
Unrealized
Holding
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
Holding
|
|
|
|
|
|
|
|
|
|
Cost (a)
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Cost (a)
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
investments held in the Equities Account:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
marketable equity securities, at fair value
|
|
$ |
30,103 |
|
|
$ |
410 |
|
|
$ |
(242 |
) |
|
$ |
30,271 |
|
|
$ |
30,271 |
|
|
$ |
42,449 |
|
|
$ |
5,631 |
|
|
$ |
(12 |
) |
|
$ |
48,068 |
|
|
$ |
48,068 |
|
Derivatives,
at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,607 |
|
Non-marketable
equity securities, at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,961 |
|
DFR
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
preferred stock, net of unrecognized gain (Note 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
81,453 |
|
|
$ |
- |
|
|
$ |
(11,075 |
) |
|
$ |
70,378 |
|
|
|
70,378 |
|
Common
stock, at equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,888 |
|
|
|
|
|
|
|
|
|
|
|
1,651 |
|
|
|
1,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
83,341 |
|
|
$ |
- |
|
|
$ |
(11,075 |
) |
|
$ |
72,029 |
|
|
|
72,240 |
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
equity (b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint
venture with THI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jurlique
International Pty Ltd. (c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,504 |
|
Other
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,182 |
|
Non-marketable
equity securities, at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
133,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
141,909 |
|
__________________________________
(a)
|
The
cost of available-for-sale securities have been reduced by any Other Than
Temporary Losses on Investments (see Note
20).
|
(b)
|
The
Company’s consolidated equity in the earnings (losses) of investees
accounted for under the Equity Method includes: Joint venture with THI
(“TimWen”) with our equity in its net earnings included as a component of
“Other operating expense (income), net” (see Note 21) and (2) other equity
in net earnings (losses) included as a component of “Other income
(expense), net” (see Note 22).
|
(c)
|
The
carrying value of the investment in Jurlique International Pty Ltd. and a
certain cost investment, acquired as part of the Wendy’s Merger and
included in Other cost investments, have been reduced by Other Than
Temporary Losses on Investments (see Note
20).
|
Equities
Account
Prior to
2006, we invested $75,000 in the Equities Account, and in April 2007, we entered
into an agreement under which (1) the Management Company will continue to manage
the Equities Account until at least December 31, 2010, (2) we will not withdraw
our investment from the Equities Account prior to December 31, 2010 (see below
regarding certain permitted transactions in 2008) and (3) beginning January 1,
2008, we began to pay management and incentive fees to the Management Company in
an amount customary for other unaffiliated third party investors with similarly
sized portfolios. Prior thereto, we were not charged any management
fees. As a result of the withdrawal restriction, the amounts in the
Equities Account are reported as non-current assets and
liabilities. The Equities Account is invested principally in the
equity securities of a limited number of publicly-traded companies, cash
equivalents and equity derivatives and had a fair value of $37,696 and $99,320
as of December 28, 2008 and December 30, 2007, respectively, consisting of:
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
|
|
December
28, 2008 (b)
|
|
|
December
30, 2007
|
|
Restricted
cash equivalents
|
|
$ |
26,515 |
|
|
$ |
43,356 |
|
Investments
|
|
|
30,414 |
|
|
|
48,354 |
|
Derivatives
in an asset position (included in “Investments”) (a)
|
|
|
- |
|
|
|
7,607 |
|
Investment
related receivables (included in “Accounts and notes
receivable”)
|
|
|
- |
|
|
|
203 |
|
Investment
related receivables (included in “Deferred costs and other
assets”)
|
|
|
372 |
|
|
|
110 |
|
Securities
sold with an obligation to purchase (included in “Other
liabilities”)
|
|
|
(16,626 |
) |
|
|
- |
|
Derivatives
in a liability position (included in “Other liabilities”)
(a)
|
|
|
(2,979 |
) |
|
|
(310 |
) |
Total
fair value
|
|
$ |
37,696 |
|
|
$ |
99,320 |
|
_________________________
(c)
|
We
did not designate any of the derivatives as hedging instruments and,
accordingly, all of these derivative instruments were recorded at fair
value with changes in fair value recorded in our results of
operations.
|
(d)
|
The
fair value of the Equities Account at December 28, 2008 excludes $47,000
of restricted cash released from the Equities Account in
2008. We obtained permission from the Management Company to
release this amount from the aforementioned investment restriction and we
are obligated to return this amount to the Equities Account by
January 29, 2010.
|
DFR
Investments
Prior to
2006, the Company was granted 404 shares of restricted common stock of DFR (the
“DFR Restricted Shares”) and options to purchase an additional 1,346 shares of
common stock of DFR (collectively with DFR Restricted Shares, the “DFR
Investments”). The DFR Investments vested one third in each of 2005,
2006 and 2007. DFR Restricted Shares which vested had fair values of $1,236 and
$2,270 in 2007 and 2006, respectively. The restricted options that vested had
fair values of $316 and $239 in 2007 and 2006, respectively. During
2007 and 2006, the Company received unrestricted shares of common stock of DFR
(the “Incentive Fee Shares”) with respect to the payment of a portion of the
incentive fees otherwise due to the Company by DFR, aggregating 21 and 52
shares, respectively.
In May
2006, the Company granted an aggregate 50 of the vested DFR Restricted Shares
owned by the Company as restricted stock to two then employees of the
Company. This restricted stock was scheduled to vest ratably over a
three-year vesting period with the first one-third vesting in February
2007. The remaining two-thirds vested in December 2007 in connection
with the Deerfield Sale. In March 2007, the Company granted an
aggregate 97 of the vested DFR Restricted Shares owned by the Company as
restricted stock to other then employees of the Company. These shares were
anticipated to vest ratably over a three-year period beginning in February 2008.
Prior to vesting, the shares granted were accounted for under the Equity Method
(see Note 27). With the exception of the March 2007 grant of the
vested DFR Restricted Shares to employees, all of DFR Restricted Shares were
distributed to the members of Deerfield immediately prior to the Deerfield
Sale.
The DFR
Investments represented compensation granted to us in consideration of the
Company’s management of DFR. The DFR Investments were initially
recorded at fair value, which was $6,058 and $263 for the restricted stock and
stock options, respectively, with an equal offsetting credit to deferred income
and were adjusted for any subsequent changes in their fair
value. Such deferred income was amortized to revenues as “Asset
management and related fees” ratably over the three-year vesting period of the
DFR Investments and amounted to $163 and $2,406 for the years ended 2007
and 2006, respectively. During 2007 and 2006, the Company recorded
its ($4) and $54, respectively, equity (reduction in equity) in the value of the
DFR Investments recognized by DFR as a change to the Company’s equity in the net
earnings of DFR with an equal offsetting increase in “Additional paid-in
capital.”
Prior to
the Deerfield Sale, the Company had been accounting for its vested DFR common
stock under the Equity Method due to the Company’s significant influence over
the operational and financial policies of DFR, principally reflecting the
Company’s representation on DFR’s board of directors and the management of DFR
by the Company. As discussed below, after the Deerfield Sale, as well
as after the distribution of the 1,000 shares of common stock of DFR acquired
prior to 2006 discussed below, the Company continued to account for its
investment in the common shares of DFR under the Equity Method. The
Company received
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
$4,171
and $1,818 of distributions with respect to its aggregate investment in DFR
during 2007 and 2006 respectively, which, in accordance with the Equity Method,
reduced the carrying value of this investment.
Presented
below is summary financial information of DFR as of and for the year ended
December 31, 2007 and for the year ended December 31, 2006, DFR’s year ends. As
we held our equity investment in DFR for less than one quarter in 2008, we are
not required to present any data for that year. The company’s actual ownership
in DFR Common Stock was 0.3% in 2007 and 2.6% in 2006. The summary
financial information is taken from balance sheets which do not distinguish
between current and long-term assets and liabilities and is as
follows:
|
Year
End
|
|
|
2007
|
|
Balance
sheet information:
|
|
|
Cash
and cash equivalents
|
$ 113,733
|
|
Investments
in securities
|
6,342,477
|
|
Other
investments
|
738,404
|
|
Other
assets
|
593,355
|
|
|
$ 7,787,969
|
|
|
|
|
Accounts
payable and accrued liabilities
|
$ 66,028
|
|
Securities
sold under agreements to repurchase
|
5,303,865
|
|
Long-term
debt
|
775,368
|
|
Other
liabilities
|
1,057,972
|
|
Convertible
preferred stock
|
116,162
|
|
Stockholders’
equity
|
468,574
|
|
|
$ 7,787,969
|
|
|
|
|
|
|
|
|
2007
|
2006
|
Income
statement information:
|
|
|
Revenues
|
$ 92,536
|
$ 84,683
|
(Loss)
income before income taxes
|
(95,256)
|
71,581
|
Net (loss) income
|
(96,591)
|
71,575
|
Investment
in joint venture with Tim Hortons Inc.
Wendy’s
is a partner in a Canadian restaurant real estate joint venture with THI
(“TimWen”). Wendy’s 50% share of the joint venture is accounted for
using the Equity Method. Our equity in earnings from this joint
venture is included in “Other Operating Expense (Income), net” in the
accompanying Consolidated Statement of Operations (see Note 21). The
Company’s equity in its investment in TimWen at December 28, 2008 of $89,771
exceeds its historical underlying net assets by $64,799. Such amount
is being accounted for as if TimWen were a consolidated
subsidiary. As such, the excess is assumed to have been allocated to
net amortizable assets with an average life of 21.1 years (see Note 3 and
9).
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
Presented
below is a summary of components related to our portion of TimWen included in
our Consolidated Balance Sheet and Consolidated Statement of Operations as of
and for the quarter ended December 28, 2008 (since the Wendy’s
Merger).
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
cost basis at September 29, 2008
|
|
$ |
41,649 |
|
|
Purchase
price adjustments (Note 3)
|
|
|
65,455 |
|
|
|
|
|
107,104 |
|
|
|
|
|
|
|
|
Equity
in earnings for the quarter ended December 28, 2008
|
|
|
2,630 |
|
|
Amortization
of purchase price adjustments
|
|
|
(656 |
) |
|
|
|
|
1,974 |
|
(a)
|
|
|
|
|
|
|
Distribution
|
|
|
(2,864 |
) |
|
Currency
translation adjustment included in “Comprehensive Income
(loss)”
|
|
|
(16,443 |
) |
|
Balance
at December 28, 2008
|
|
$ |
89,771 |
|
(b)
|
__________________________________
(a)
|
Equity
in earnings for the quarter ended December 28, 2008 are included in “Other
operating expense, net” in the Consolidated Statement of
Operations.
|
(b)
|
Included
in ‘Investments” in the Consolidated Balance
Sheets
|
Presented
below is a summary of financial information of TimWen as of and for
the quarter ended December 28, 2008. The financial statements have
been prepared in Canadian dollars. The summary financial information
is taken from balance sheets which do not distinguish between current and
long-term assets and liabilities and is as follows:
|
|
December
28, 2008
|
|
|
|
(Canadian)
|
|
Balance
sheet information:
|
|
|
|
Properties
|
C |
$ |
87,292 |
|
Cash
and cash equivalents
|
|
|
5,063 |
|
Accounts
receivable
|
|
|
3,339 |
|
Other
|
|
|
3,142 |
|
|
C |
$ |
98,836 |
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
C |
$ |
2,521 |
|
Other
liabilities
|
|
|
10,893 |
|
Partners’
equity
|
|
|
85,422 |
|
|
C |
$ |
98,836 |
|
|
|
|
|
|
|
|
Quarter
ended December 28, 2008
|
|
|
|
(Canadian)
|
|
|
|
(Unaudited)
|
|
Income
statement information:
|
|
|
|
|
Revenues
|
C |
$ |
9,462 |
|
Income
before income taxes and net income
|
|
|
6,325 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
Investment
in Jurlique International Pty Ltd.
Prior to
2006, we acquired a 29.1% interest in Jurlique for approximately
$30,164. Jurlique is an Australian manufacturer and multi-channel
global marketer which sells a high-end series of natural skincare products in
certain department stores, duty-free shops, company and franchised
locations. In April 2006, we sold 17.6% of our ownership interest to an
independent third party for $14,600. Prior to the closing of the
sale, Jurlique paid us a return of capital of $8,782. We recorded a
gain on the sale of $1,722 included in “Other income (expense), net” in the
accompanying Consolidated Statement of Operations (see Note 22). In
the second quarter of 2008, a minority interest partner purchased an approximate
new 2.7% ownership position in Jurlique, thereby reducing our ownership position
to 11.3%.
We
account for our investment in Jurlique under the Cost Method since our voting
interest does not provide us the ability to exercise significant influence over
Jurlique’s operational and financial policies. In connection with the
Jurlique investment, we entered into certain foreign currency related derivative
transactions that extended through July 2007 for which, at their settlement
date, we recorded a loss of $877, which is included in “Other income (expense),
net” in the accompanying consolidated statement of operations (see Note
22).
Jurlique
is being affected by the global economic recession leading to lower than
anticipated sales and margins. Based on financial results provided by
the company, which noted significant declines in operations in 2008, its budget
for 2009, current economic conditions and our internal valuations of the
company, we have determined that our investment in this company will more than
likely not be recoverable. Therefore, we recorded other than temporary losses of
$8,504 in 2008, which are included in “Other than temporary losses on
investments” (see Note 20).
Investment
in Encore Capital Group, Inc.
Prior to
2006, the Company and certain of its former officers had invested in the common
stock of Encore Capital Group, Inc. (“Encore”). Through the 2007 sale of
substantially all of its holdings of Encore, the Company’s investment in Encore
had been accounted for under the Equity Method even though it owned less than
20% of the voting stock of Encore, because of its then ability to exercise
significant influence over operating and financial policies of Encore through
the Company’s representation on Encore’s board of directors. After
the 2007 sale until the distribution to its former executives of its entire
remaining holdings at the end of 2007, this investment was accounted for as
an available-for-sale security.
The
Company recorded gains of $2,558 and $2,241 in 2007 and 2006, respectively, as a
result of sales of Encore common stock by the Company. The Company
recorded a non-cash gain of $18 in 2006 from the exercise of Encore stock
options not participated in by the Company. There were no such
exercises during 2007. All such gains are included in “Other Income (Expense),
net” (see Note 22) in the accompanying Consolidated Statements of
Operations.
Presented
below is summary unaudited financial information for the Company’s equity
investment in Encore, which was disposed of in 2007, for the year ended December
31, 2006, the year end of such investment.
|
|
2006
|
|
|
|
|
|
|
Income
statement information:
|
|
|
|
|
Revenues
|
|
$ |
255,140 |
|
Income before income
taxes
|
|
|
41,188 |
|
Net income
|
|
|
24,008 |
|
The
following is a summary of the components of goodwill:
|
|
Year
End
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$ |
865,347 |
|
|
$ |
480,350 |
|
Accumulated
amortization
|
|
|
(11,572 |
) |
|
|
(11,572 |
) |
|
|
$ |
853,775 |
|
|
$ |
468,778 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
Following
the Wendy’s Merger, the Company operates in two business segments consisting of
two restaurant brands: (1) Wendy’s restaurants and (2) Arby’s restaurants. Each
segment includes reporting units for Company-owned restaurants and franchise
operations for purposes of measuring goodwill impairment under SFAS
142.
During
the second and third quarters of 2008, we performed interim goodwill impairment
tests at our Arby’s company-owned restaurant and franchise operations reporting
units due to the general economic downturn, a decrease in market valuations, and
decreases in Arby’s same store sales. The results of these interim
tests indicated that the fair values of each of these Arby’s reporting units
exceeded their carrying values.
During
the fourth quarter of 2008, we performed our annual goodwill impairment
test. As a result of the acceleration of the general economic and
market downturn as well as continued decreases in Arby’s same store sales, we
concluded that the carrying amount of the Arby’s Company-owned restaurant
reporting unit exceeded its fair value. Accordingly, we completed
“step two” of our impairment testing as prescribed in SFAS 142 and recorded an
impairment charge of $460,075 (with a $68,340 tax benefit related to the portion
of tax deductible goodwill) representing all of the goodwill recorded for the
Arby’s Company-owned restaurant reporting unit. We also concluded at
that time that there was no impairment of goodwill for the Arby’s franchise
reporting unit or any of the Wendy’s reporting units.
The fair
values of the reporting units were determined by management with the assistance
of an independent third-party valuation firm.
|
|
2008
|
|
|
2007
|
|
|
|
Arby’s
Restaurant Segment
|
|
|
Wendy’s
Restaurant Segment
|
|
|
Total
|
|
|
Arby’s
Restaurant Segment
|
|
|
Former
Asset Management Segment (Note 3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$ |
468,778 |
|
|
$ |
- |
|
|
$ |
468,778 |
|
|
$ |
466,944 |
|
|
$ |
54,111 |
|
|
$ |
521,055 |
|
Changes
in goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wendy’s
Merger (Note 3)
|
|
|
- |
|
|
|
845,631 |
|
|
|
845,631 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
restaurant acquisitions (Note 3)
|
|
|
9,299 |
|
|
|
- |
|
|
|
9,299 |
|
|
|
2,751 |
|
|
|
- |
|
|
|
2,751 |
|
Impairment
|
|
|
(460,075 |
) |
|
|
- |
|
|
|
(460,075 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Adjustment
relating to the RTM Acquisition (Note 3)
|
|
|
(385 |
) |
|
|
- |
|
|
|
(385 |
) |
|
|
(464 |
) |
|
|
- |
|
|
|
(464 |
) |
Disposed
of in the Deerfield Sale (Note 3)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(54,111 |
) |
|
|
(54,111 |
) |
Other
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(453 |
) |
|
|
- |
|
|
|
(453 |
) |
Currency
translation adjustment
|
|
|
- |
|
|
|
(9,473 |
) |
|
|
(9,473 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Balance
at end of year
|
|
$ |
17,617 |
|
|
$ |
836,158 |
|
|
$ |
853,775 |
|
|
$ |
468,778 |
|
|
$ |
- |
|
|
$ |
468,778 |
|
The
goodwill disposed of in the Deerfield Sale represents the total goodwill
recorded in 2004 when Deerfield was purchased and is included in the “Gain on
sale of consolidated business” in the accompanying Consolidated Statement of
Operations for the year ended December 30, 2007 (see Note 3).
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
The
following is a summary of the components of other intangible
assets:
|
|
|
Year-End
2008
|
|
|
Year-End
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Non-amortizable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wendy’s
trademarks
|
|
|
$ |
900,389 |
|
|
$ |
- |
|
|
$ |
900,389 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Amortizable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
agreements
|
|
|
|
350,033 |
|
|
|
4,152 |
|
|
|
345,881 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Favorable
leases
|
|
|
|
147,881 |
|
|
|
9,650 |
|
|
|
138,231 |
|
|
|
27,231 |
|
|
|
5,530 |
|
|
|
21,701 |
|
Reacquired
rights under franchise agreements
|
|
|
|
19,009 |
|
|
|
3,142 |
|
|
|
15,867 |
|
|
|
18,574 |
|
|
|
2,238 |
|
|
|
16,336 |
|
Computer
software
|
|
|
|
18,259 |
|
|
|
7,154 |
|
|
|
11,105 |
|
|
|
11,531 |
|
|
|
4,279 |
|
|
|
7,252 |
|
Other
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
109 |
|
|
|
80 |
|
|
|
29 |
|
|
|
|
|
$ |
1,435,571 |
|
|
$ |
24,098 |
|
|
$ |
1,411,473 |
|
|
$ |
57,445 |
|
|
$ |
12,127 |
|
|
$ |
45,318 |
|
Other
intangible assets, related to the restaurant operations other than favorable
leases, with an aggregate net book value of $22,299 as of December 28, 2008 are
pledged as collateral under the Company’s credit agreement (See Note
10).
Aggregate
amortization expense:
|
|
|
|
Actual
for fiscal year (a):
|
|
Total
|
|
2006
(b)
|
|
$ |
12,222 |
|
2007
(b)
|
|
|
13,509 |
|
2008
|
|
|
13,470 |
|
Estimate
for fiscal year:
|
|
|
|
|
2009
|
|
|
31,333 |
|
2010
|
|
|
28,914 |
|
2011
|
|
|
27,320 |
|
2012
|
|
|
26,364 |
|
2013
|
|
|
25,624 |
|
Thereafter
|
|
|
371,529 |
|
______________
(a)
|
Includes
$1,096, $5,329 and $3,121 of impairment charges related to
other intangible assets in 2008, 2007 and 2006, respectively (see Note 18)
which have been recorded as a reduction in the cost basis of the related
intangible asset.
|
(b)
|
Includes
$3,466 and $2,375 of amortization of asset management contracts until
their disposal with the Deerfield
Sale.
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
Long-term
debt consisted of the following:
|
|
Year-End
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Senior
secured term loan, weighted average effective interest of 5.73% as of
December 28, 2008 (a)
|
|
$ |
385,030 |
|
|
$ |
555,050 |
|
6.20%
senior notes, due in 2014 (b)
|
|
|
199,111 |
|
|
|
- |
|
6.25%
senior notes, due in 2011 (b)
|
|
|
188,933 |
|
|
|
- |
|
Sale-leaseback
obligations due through 2028 (c)
|
|
|
123,829 |
|
|
|
105,897 |
|
Capitalized
lease obligations due through 2036 (d)
|
|
|
106,841 |
|
|
|
72,355 |
|
7%
Debentures, due in 2025 (e)
|
|
|
78,974 |
|
|
|
- |
|
6.54%
Secured bank term loan, due in 2013 (f)
|
|
|
19,790 |
|
|
|
- |
|
Notes
payable, weighted average interest of 7.27% as of December 28, 2008 due
through 2014 (g)
|
|
|
5,298 |
|
|
|
- |
|
5%
convertible notes due in 2023 (h)
|
|
|
2,100 |
|
|
|
2,100 |
|
Other
|
|
|
1,671 |
|
|
|
3,931 |
|
|
|
|
1,111,577 |
|
|
|
739,333 |
|
Less
amounts payable within one year
|
|
|
(30,426 |
) |
|
|
(27,802 |
) |
|
|
$ |
1,081,151 |
|
|
$ |
711,531 |
|
Aggregate
annual maturities of long-term debt as of December 28, 2008 were as
follows:
Fiscal Year
|
Amount
|
2009
|
$ 30,426
|
2010
|
16,854
|
2011
|
394,724
|
2012
|
195,813
|
2013
|
26,534
|
Thereafter
|
447,226
|
|
$ 1,111,577
|
(a)
|
As
of December 28, 2008, the
Company maintained a credit agreement (the “Arby’s Credit Agreement”) for
its Arby’s restaurants business segment which included a senior secured
term Arby’s loan facility in the original principal amount of $620,000
(the “Arby’s Term Loan”), of which $385,030 was outstanding as of December
28, 2008, and a senior secured revolving credit facility of $100,000 which
would have expired in July 2011, under which there were no borrowings as
of December 28, 2008. However, the availability under the
revolving credit facility as of December 28, 2008 was $92,201 which is net
of a reduction of $7,799 for outstanding letters of
credit. During 2008, we made $143,213 of voluntary net
principal prepayments on the Arby’s Term Loan to assure compliance with
certain covenants in the Arby’s Credit Agreement. The Arby’s Term
Loan also required prepayments of principal amounts resulting from certain
events and, on an annual basis, from excess cash flow of the Arby’s
restaurant business as determined under the Arby’s Credit Agreement (the
“Excess Cash Flow Payment”). The Excess Cash Flow Payment for
fiscal 2007 of $10,407 was paid in the second quarter of 2008. There
will be no Excess Cash Flow Payment necessary for fiscal 2008.
Additionally in 2008, the Company reacquired Arby’s Term Loans with an
outstanding principal amount of $10,893 for approximately $7,237 (see Note
11). The Arby’s Term Loan bore
interest at the Company’s option at either (1) LIBOR plus 2.25% based on
the current leverage ratio or (2) the higher of a base rate determined by
the administrative agent for the Credit Agreement or the Federal funds
rate plus 0.50%, in either case plus 1.25% based on the current leverage
ratio.
|
|
The
obligations under the Arby’s Credit Agreement were secured by
substantially all of the assets, other than real property, of the Arby’s
restaurants segment which had an aggregate net book value of approximately
$180,507 as of December 28, 2008 and were also guaranteed by substantially
all of the entities comprising the Arby’s restaurants
segment. Neither Wendy’s/Arby’s Group, nor Wendy’s, was a party
to the guarantees. In addition, the Arby’s Credit Agreement
contained various covenants, as amended during 2007, relating to the
Arby’s restaurants segment, the most restrictive of which (1) require
periodic financial reporting, (2) require meeting certain leverage and
interest coverage ratio tests and (3) restrict, among other matters, (a)
the incurrence of indebtedness, (b) certain asset dispositions, (c)
certain affiliate transactions, (d) certain investments, (e) certain
capital expenditures and (f) the payment of dividends indirectly to
Wendy’s/Arby’s. The Company was in compliance with all of the
covenants as of December 28, 2008. During 2007, ARG paid
$37,000 of dividends indirectly to Wendy’s/Arby’s Group as permitted
under the covenants of the Credit Agreement. None were paid in
2008, and under the terms of the Arby's Credit Agreement, there was no
availability as of December 28, 2008 for the payment of dividends to
Wendy's/Arby's.
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
|
The Arby’s Credit
Agreement was amended and restated as of March 11, 2009 and Wendy’s
and certain of its affiliates in addition to ARG and certain of its
affiliates
became parties (see “Item 1A. Risk Factors – Risks Related to Wendy’s and
Arby’s Businesses – Wendy’s and its subsidiaries, and ARG and its
subsidiaries, are subject to various restrictions, and substantially all
of their non-real estate assets are pledged, under a Credit
Agreement”). Wendy’s, ARG and certain other subsidiaries are
the co-borrowers (the “Co-Borrowers”) under the amended and restated
Credit Agreement. Under the amended and restated Credit
Agreement substantially all of the assets of the Co-Borrowers (other than
real property, except for mortgages on certain Wendy’s real properties),
the stock of Wendy’s and ARG and certain of their domestic subsidiaries
and 65% of the stock of certain of their foreign subsidiaries (all subject
to certain limitations and exclusions) are pledged as collateral security,
and the Co-Borrowers’ obligations are also guaranteed by substantially all
of the domestic entities comprising the Wendy’s and Arby’s restaurant
segments (subject to certain limitations and
exclusions). The amended and restated Credit Agreement
also contains covenants that, among other things, require the Borrowers to
maintain certain maximum leverage and minimum interest coverage ratios and
restrict their ability to incur debt, pay dividends or make other
distributions to Wendy’s/Arby’s, make certain capital expenditures, enter
into certain fundamental transactions (including sales of assets and
certain mergers and consolidations) and create or permit
liens.
|
|
The amended and
restated Credit Agreement includes a senior secured term loan
facility (the “Amended Arby’s Term Loan”), which had $384,034 outstanding
as of March 11, 2009, and a senior secured revolving credit facility of
$100,000. The Amended Arby’s Term Loan is due not later
than July 2012 and the revolving credit facility expires in July
2011. The revolving credit facility includes a subfacility for
the issuance of letters of credit up to $50,000. As of March
11,
2009,
$26,182 of loans were
outstanding and letters of credit in the aggregate amount
of $35,117 were issued under
the amended and restated
Credit
Agreement. The
Amended Arby’s Term Loan and amounts borrowed under the revolving credit
facility bear interest at the borrowers’ option at either (1) LIBOR of not
less than 2.75% plus 4.00% or (2) the higher of a base rate determined by
the administrative agent for the Credit Agreement or the Federal funds
rate plus 0.50% (but not less than 3.75%), in either case plus
3.00%. The borrowers are
also charged a facility fee based on the unused portion of the total
credit facility of 0.50% per
annum.
|
(b)
|
Wendy’s
senior notes (the “Senior Notes”) were adjusted to fair value at the date
of and in connection with the Wendy’s Merger based on outstanding
principal of $224,638 and $199,704 and effective interest rates of 7.0%
and 6.6% for the 6.20% senior notes, 6.25% senior notes, respectively.
(See Note 3). Theses notes are unsecured and are redeemable prior to
maturity at our option. These Senior Notes contain covenants that restrict
the incurrence of indebtedness secured by liens and sale-leaseback
transactions. The Company was in compliance with these covenants as of
December 28, 2008.
|
(c)
|
The
sale-leaseback obligations (the “Sale-Leaseback Obligations”), which
extend through 2028, relate to capitalized restaurant leased
assets with an aggregate net book value of $120,377 as of December 28,
2008 (see Note 25).
|
(d)
|
The
capitalized lease obligations (the “Capitalized Lease Obligations”), which
extend through 2036, relate to Arby’s capitalized restaurant leased assets
and software with aggregate net book values of $66,690 and $6,390
respectively, as of December 28, 2008 and Wendy’s capitalized leased
buildings and land with aggregate net book values of $28,223 and $8,840
respectively (see Note 25).
|
(e)
|
Wendy’s
7% Debentures (the “Debentures”) are unsecured and were adjusted to fair
value at the date of and in connection with the Wendy’s Merger based on
their outstanding principal of $97,135 and an effective interest rate of
8.6% (see Note 3). These Debentures contain covenants that restrict the
incurrence of indebtedness secured by liens and sale-leaseback
transactions. The Company was in compliance with these covenants as of
December 28, 2008.
|
(f)
|
During
2008 we entered into a new $20,000 financing facility for one of our
existing aircraft (the “Bank Term Loan”). The facility requires
monthly payments, including interest, of approximately $180 through August
2013 with a final balloon payment of approximately $15,180 due September
2013. This loan is secured by an airplane with a net book value
of $12,467 as of December 28, 2008.
|
(g)
|
The
notes payable (the “Notes Payable”) were assumed as part of the California
Restaurant Acquisition (see Note
3).
|
(h)
|
The
5% convertible notes (the “Convertible Notes”) are convertible into
160,000 shares of our common stock, as adjusted due to the dividend of DFR
common stock distributed to our stockholders in April 2008 (see Note
8). The Convertible Notes are redeemable at our option
commencing May 20, 2010 and at the option of the holders on May 15, 2010,
2015 and 2020 or upon the occurrence of a fundamental change, as defined,
relating to us, in each case at a price of 100% of the principal amount of
the convertible notes plus accrued
interest.
|
A
significant number of the underlying leases in the Arby’s restaurants segment
for the Sale-Leaseback Obligations and the Capitalized Lease Obligations, as
well as operating leases, require or required periodic financial reporting of
certain subsidiary entities
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
within
ARG or of individual restaurants, which in many cases has 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 December 28, 2008, 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 consolidated financial position or results of
operations.
On
January 14, 2009, Wendy’s executed a new $200,000 revolving credit facility (the
“Wendy’s Revolver”), borrowings under which were secured by substantially all of
Wendy’s current assets, intangibles, stock of Wendy’s subsidiaries and a portion
of their real and personal property. The Wendy’s Revolver was terminated
effective March 11, 2009, in connection with the execution of the amended and
restated Credit Agreement described above.
AFA
Service Corporation (“AFA”), an independently controlled advertising cooperative
in which we have voting interests of less than 50% has a $3,500 line of
credit. The availability under the AFA line of credit as of December
28, 2008 was $3,000.
Wendy’s
U.S. advertising fund has a revolving line of credit of $25,000 with a fee of
0.35% on the unused portion. Neither the Company, nor Wendy’s, is the guarantor
of the debt. The advertising fund facility was established to fund the
advertising fund operations (see Note 29). There are no amounts
outstanding under this facility as of December 28, 2008.
At
December 28, 2008, one of Wendy’s Canadian subsidiaries had a revolving credit
facility of $6,000 Canadian dollars. No amounts were outstanding
under this facility as of December 28, 2008 which bears interest at the Bank of
Montreal Prime Rate.
During
2006, an aggregate $172,900 principal amount of the Company’s Convertible Notes
were converted or effectively converted into an aggregate of 4,323 shares of
class A common stock and 8,645 shares of class B common stock (see Note
10). In order to induce the effective conversions, the Company paid
negotiated premiums aggregating $8,998 to certain converting noteholders
consisting of cash of $4,975 and 244 shares of class B common stock with an
aggregate fair value of $4,023 based on the closing market price of the
Company’s class B common stock on the dates of the effective
conversions. The aggregate resulting increase to “Stockholders’
equity” was $177,818 consisting of the $172,900 principal amount of the
Convertible Notes, the $4,023 fair value for the shares issued for premiums and
the $895 fair value of 54,000 shares of class B common stock issued to certain
note holders who agreed to receive such shares in lieu of a cash payment for
accrued interest.
The
components of the gain and losses on early extinguishments of debt in 2008 and
2006, respectively, are as follows:
|
|
2008
|
|
|
2006
|
|
Discount
on amounts voluntarily prepaid on the Arby’s Term Loans (Note
10)
|
|
$ |
3,656 |
|
|
$ |
- |
|
Premiums
paid in cash and Class B Common Shares upon conversion of the Convertible
Notes
|
|
|
- |
|
|
|
(8,998 |
) |
Write-off
of previously unamortized deferred financing and other costs primarily on
Convertible Notes
|
|
|
- |
|
|
|
(5,084 |
) |
|
|
$ |
3,656 |
|
|
$ |
(14,082 |
) |
The
Company invests in derivative instruments that are subject to the guidance in
SFAS 133. At December 28, 2008, these instruments are as follows: (1)
put options on equity securities and (2) total return swaps on equity
securities. Prior to their expiration through October 2008, we also had three
interest rate swap agreements (the “Swap Agreements”) related to our Term Loan
(see Note 10). Prior to the effective redemptions of the Opportunities Fund and
the DM Fund (see Note 1), the Company had invested in short-term trading
derivatives as part of its overall investment portfolio strategy. Other than the
Swap Agreements, the Company did not designate these derivatives as hedging
instruments, and accordingly, these derivative instruments were recorded at fair
value with changes in fair value recorded in the Company’s results of
operations. In addition, prior to the Deerfield sale, we had a
derivative instrument related to the vested portion of stock options owned by
the Company in DFR (see Note 27). The Company also had a put and call
arrangement that matured in July 2007 on a portion of the foreign currency
exposure of its investment in Jurlique.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
The Swap
Agreements hedged a portion of the related Term Loan interest rate risk
exposure. As discussed in Note 10, interest payments under
Arby’s Term Loan are based on LIBOR plus a spread. These hedges of
interest rate risk relating to Arby’s Term Loan had been designated as effective
cash flow hedges at inception and on an ongoing quarterly basis through their
expiration dates. There was no ineffectiveness from these hedges
through their expiration in 2008. Accordingly, gains and losses from
changes in the fair value of the hedges were included in the “Unrealized gains
(loss) on cash flow hedges” component of “Accumulated other comprehensive income
(loss).” If a hedge or portion thereof had been determined to be
ineffective, any changes in fair value would have been recognized in the
Company’s results of operations.
The
Company’s cash flow hedges included the Swap Agreements and the equity in DFR’s
cash flow hedges. The following is a summary of the components of the
net change in unrealized gains and losses on cash flow hedges included in
comprehensive income (loss):
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Unrealized
holding gains (losses) arising during the year
|
|
$ |
251 |
|
|
$ |
(826 |
) |
|
$ |
2,084 |
|
Equity
in change in unrealized holding gains (losses) arising during the
year
|
|
|
3 |
|
|
|
(1,087 |
) |
|
|
(272 |
) |
Reclassifications
of prior year unrealized holding gains into net income or
loss
|
|
|
- |
|
|
|
(1,951 |
) |
|
|
(1,488 |
) |
|
|
|
254 |
|
|
|
(3,864 |
) |
|
|
324 |
|
Income
tax (provision) benefit
|
|
|
(99 |
) |
|
|
1,472 |
|
|
|
(135 |
) |
|
|
$ |
155 |
|
|
$ |
(2,392 |
) |
|
$ |
189 |
|
The
notional amounts and the carrying amounts of the Company’s derivatives described
above as of December 28, 2008, all of which are in “Other
liabilities” in the accompanying consolidated balance sheet, are as
follows:
|
|
Year-End
2008
|
|
|
|
Notional
Amount
|
|
|
Carrying
Amount
|
|
Put
options on equity securities
|
|
$ |
(111 |
) |
|
$ |
(7 |
) |
Total
return swaps on equity securities
|
|
|
14,715 |
|
|
$ |
(2,979 |
) |
Recognized
net gains (losses) on the Company’s derivatives were classified in the
accompanying consolidated statements of operations as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Swap
Agreements
|
|
$ |
(1,797 |
) |
|
$ |
1,917 |
|
|
$ |
1,513 |
|
Investment
income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Put
and call option combinations on equity securities
|
|
|
2,411 |
|
|
|
3,315 |
|
|
|
305 |
|
Total
return swaps on equity securities
|
|
|
(5,165 |
) |
|
|
2,144 |
|
|
|
43 |
|
Put
options
|
|
|
1,036 |
|
|
|
(1,036 |
) |
|
|
- |
|
Trading
derivatives
|
|
|
- |
|
|
|
(741 |
) |
|
|
2,878 |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
(59 |
) |
Other
income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency put and call arrangement settled in 2007 (Note
22)
|
|
|
- |
|
|
|
(877 |
) |
|
|
(420 |
) |
|
|
$ |
(3,515 |
) |
|
$ |
4,722 |
|
|
$ |
4,260 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
The
carrying amounts and estimated fair values of the Company’s financial
instruments for which the disclosure of fair values is required were as
follows:
|
|
Year-End
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents (a)
|
|
$ |
90,102 |
|
|
$ |
90,102 |
|
|
$ |
78,116 |
|
|
$ |
78,116 |
|
Restricted
cash equivalents (Note 7) (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
20,792 |
|
|
|
20,792 |
|
|
|
- |
|
|
|
- |
|
Non-current
|
|
|
34,032 |
|
|
|
34,032 |
|
|
|
45,295 |
|
|
|
45,295 |
|
Short-term
investments (Note 6) (b)
|
|
|
162 |
|
|
|
162 |
|
|
|
2,608 |
|
|
|
2,608 |
|
DFR
Preferred Stock (Notes 3 and 8) (c)
|
|
|
- |
|
|
|
- |
|
|
|
70,378 |
|
|
|
70,378 |
|
DFR
Notes receivable (Note 4) (d)
|
|
|
25,344 |
|
|
|
25,344 |
|
|
|
46,219 |
|
|
|
46,219 |
|
Non-current
Cost Investments (Note 8) for which it is:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Practicable
to estimate fair value (e)
|
|
|
12,010 |
|
|
|
11,927 |
|
|
|
12,686 |
|
|
|
17,490 |
|
Not
practicable to estimate fair value (f)
|
|
|
788 |
|
|
|
|
|
|
|
1,308 |
|
|
|
|
|
Restricted
investments (Notes 6 and 8) (b)
|
|
|
30,271 |
|
|
|
30,271 |
|
|
|
55,675 |
|
|
|
55,675 |
|
Swap
agreements (Note 12) (g)
|
|
|
- |
|
|
|
- |
|
|
|
116 |
|
|
|
116 |
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swap
agreements (Note 12) (g)
|
|
|
- |
|
|
|
- |
|
|
|
360 |
|
|
|
360 |
|
Long-term
debt, including current portion (Note 10):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
secured term loan, weighted average effective interest of 5.73% as of
December 28, 2008 (b)
|
|
|
385,030 |
|
|
|
238,718 |
|
|
|
555,050 |
|
|
|
555,050 |
|
6.20%
senior notes, due in 2014 (b)
|
|
|
199,111 |
|
|
|
214,710 |
|
|
|
- |
|
|
|
- |
|
6.25%
senior notes, due in 2011 (b)
|
|
|
188,933 |
|
|
|
198,151 |
|
|
|
|
|
|
|
|
|
Sale-leaseback
obligations due through 2028 (h)
|
|
|
123,829 |
|
|
|
136,707 |
|
|
|
105,897 |
|
|
|
112,851 |
|
Capitalized
lease obligations due through 2036 (h)
|
|
|
106,841 |
|
|
|
111,788 |
|
|
|
72,355 |
|
|
|
76,582 |
|
7%
Debentures, due in 2025 (b)
|
|
|
78,974 |
|
|
|
89,503 |
|
|
|
- |
|
|
|
- |
|
6.54%
Secured bank term loan, due in 2013 (h)
|
|
|
19,790 |
|
|
|
21,072 |
|
|
|
- |
|
|
|
- |
|
Notes
payable, weighted average interest of 7.27% as of December 28, 2008 due
through 2014 (h)
|
|
|
5,298 |
|
|
|
5,553 |
|
|
|
- |
|
|
|
- |
|
5%
convertible notes due in 2023 (i)
|
|
|
2,100 |
|
|
|
1,934 |
|
|
|
2,100 |
|
|
|
2,058 |
|
Other
|
|
|
1,671 |
|
|
|
1,775 |
|
|
|
3,931 |
|
|
|
4,029 |
|
Total
long-term debt, including current portion
|
|
|
1,111,577 |
|
|
|
1,019,911 |
|
|
|
739,333 |
|
|
|
750,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
sold with an obligation to purchase-restricted (Note 8)
(b)
|
|
|
16,626 |
|
|
|
16,626 |
|
|
|
- |
|
|
|
- |
|
Other
derivatives in liability positions - restricted (Notes 8 and 12)
(b)
|
|
|
2,979 |
|
|
|
2,979 |
|
|
|
310 |
|
|
|
310 |
|
Guarantees
of (Note 26):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
obligations for Arby’s restaurants not operated by the Company
(j)
|
|
|
460 |
|
|
|
460 |
|
|
|
540 |
|
|
|
540 |
|
Debt
obligations of AmeriGas Eagle Propane, L.P. (k)
|
|
|
- |
|
|
|
690 |
|
|
|
- |
|
|
|
690 |
|
Franchisee
loans obligations (l)
|
|
|
706 |
|
|
|
706 |
|
|
|
- |
|
|
|
- |
|
(a)
|
The
carrying amounts approximated fair value due to the short-term maturities
of the cash equivalents or restricted cash equivalents.
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
(b)
|
The
fair values are based on quoted market
prices.
|
(c)
|
The
fair value of the DFR Preferred Stock received in connection with the
Deerfield Sale as of December 30, 2007 was based on the quoted market
price of the related DFR Common Stock into which it was mandatorily
convertible and is shown net of a deferred gain of $6,945. The
DFR preferred stock was converted to DFR common stock and distributed to
our stockholders in 2008 (Note 3).
|
(d)
|
The
fair value of the DFR Notes received in connection with the Deerfield Sale
was based on the present value of the probability weighted average of
expected cash flows of the notes which could reasonably approximate their
collectability. The Company believes that the 2007 present value
approximated the fair value of the DFR Notes as of December 30, 2007 due
to the close proximity to the Deerfield Sale. Due to
significant financial weakness in the credit markets and at DFR and based
upon current publicly available information and other factors further
discussed in Note 4, the company established an allowance for doubtful
accounts for the DFR Notes of $21,227 at December 28, 2008. The notes’
carrying amount net of the allowance was $25,344 at December 28,
2008.
|
(e)
|
These
consist of investments in certain non-current cost
investments. The fair values of these investments, other than
Jurlique (see Note 8), were based entirely on statements of account
received from investment managers or investees which are 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 relies on valuations performed by the
investment managers or investees in valuing those investments or
third-party appraisals. The fair value of our investment in
Jurlique as of December 30, 2007 was based upon the price per share
received upon the sale of a portion of our investment during
2006. We evaluated operating reports and other available
information of Jurlique for 2007 which did not indicate any change in this
valuation as of December 30, 2007. Based on an evaluation of
our investment in Jurlique and their operating results in 2008 (see Note
20), we determined that its value had declined due to a significant
deterioration in their operating results and, utilizing a market multiples
model based on projected performance, that the decline was other than
temporary. Therefore we recorded an other than temporary loss
of the entire investment carrying value of $8,504 in 2008 (Note
20).
|
(f)
|
It
was not practicable to estimate the fair value of these cost investments
because the investments are
non-marketable.
|
(g)
|
The
fair values were based on quotes provided by the bank
counterparties.
|
(h)
|
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.
|
(i)
|
The
fair values were based on broker/dealer prices since quoted asked prices
close to our fiscal year end dates were not available for the remaining
Convertible Notes.
|
(j)
|
The
fair value was assumed to reasonably approximate the carrying amount since
the carrying amount represents the fair value as of the RTM Acquisition
date less subsequent amortization.
|
(k)
|
The
fair value was determined by management, with the assistance of a
valuation firm, based on the net present value of the probability adjusted
payments which may be required to be made by the
Company.
|
(l)
|
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. In accordance with FIN 45, “Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others”, 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, non-current notes
receivable (excluding the DFR Notes described above), advertising fund
restricted assets and liabilities, accounts payable and accrued expenses, other
than the swap agreements detailed in the table above, approximated fair value
due to the related allowance for doubtful accounts and notes receivable and the
short-term maturities of accounts and notes receivable, accounts payable and
accrued expenses and, accordingly, they are not presented in the table
above.
In
September 2006, FASB issued SFAS No. 157, as amended, “Fair Value Measurements,”
(“SFAS 157”). SFAS 157 addresses issues relating to the definition of
fair value, the methods used to measure fair value and expanded disclosures
about fair value measurements. SFAS 157 does not require any new fair
value measurements. The definition of fair value in SFAS 157 focuses
on the price that would be received to sell an asset or paid to transfer a
liability, not the price that would be paid to acquire an asset or received to
assume a liability. The methods used to measure fair value should be
based on the assumptions that market participants would use in
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
pricing
an asset or a liability (“Market Value Approach”). SFAS 157 expands
disclosures about the use of fair value to measure assets and liabilities in
interim and annual periods subsequent to adoption. FASB Staff
Position (“FSP”) No. FAS 157-1, “Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements that Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement
13” (“FSP FAS 157-1”), states that SFAS 157 does not apply under SFAS No. 13,
“Accounting for Leases” (“SFAS 13”), and other accounting pronouncements that
address fair value measurements for purposes of lease classification or
measurement under SFAS 13. In addition, FSP No. FAS 157-2, “Effective
Date of FASB Statement No. 157” (“FSP FAS 157-2”), defers the application of
SFAS 157 to nonfinancial assets and nonfinancial liabilities until our 2009
fiscal year, except for items recognized or disclosed on a recurring basis at
least annually. FSP No. FAS 157-3, “Determining the Fair Value of a
Financial Asset in a Market that is Not Active,” (“FSP FAS 157-3”) clarifies the
application of SFAS 157 when the market for a financial asset is
inactive. This new guidance illustrates the fact that approaches
other than the Market Value Approach to determining fair value may be
appropriate for instruments such as those for which the market is no longer
active. In utilizing these other approaches, however, the guidance
reiterates certain of the measurement principles described in SFAS
157. SFAS 157 was, with some limited exceptions, applied
prospectively and was effective commencing with our first fiscal quarter of
2008, with the exception of the areas mentioned above under which exemptions to
or deferrals of the application of certain aspects of SFAS 157
apply. Our adoption of SFAS 157 and the related staff positions in
2008 did not result in any change in the methods we use to measure the fair
value of our financial assets and liabilities. We are presenting the expanded
fair value disclosures of SFAS 157 below.
The fair
values of our financial assets or liabilities and the hierarchy of the level of
inputs are summarized below:
|
|
December
28,
|
|
|
Fair
Value Measurements at December 28, 2008 Using
|
|
|
|
2008
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments (Note 6) (b)
|
|
$ |
162 |
|
|
$ |
162 |
|
|
$ |
- |
|
|
$ |
- |
|
Restricted
investments (Notes 6 and 8) (b)
|
|
|
30,271 |
|
|
|
30,271 |
|
|
|
- |
|
|
|
- |
|
Total
assets
|
|
$ |
30,433 |
|
|
$ |
30,433 |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
sold with an obligation to purchase-restricted (Note 8)
(b)
|
|
$ |
16,626 |
|
|
$ |
16,626 |
|
|
$ |
- |
|
|
$ |
- |
|
Other
derivatives in liability positions-restricted
(Notes 8 and 12) (b)
|
|
|
2,979 |
|
|
|
2,979 |
|
|
|
- |
|
|
|
- |
|
Total
liabilities
|
|
$ |
19,605 |
|
|
$ |
19,605 |
|
|
$ |
- |
|
|
$ |
- |
|
Income
Taxes
The
(loss) income from continuing operations before income taxes and minority
interests consisted of the following components:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Domestic
|
|
$ |
(583,339 |
) |
|
$ |
9,450 |
|
|
$ |
5,221 |
|
Foreign
|
|
|
2,427 |
|
|
|
(36 |
) |
|
|
111 |
|
|
|
$ |
(580,912 |
) |
|
$ |
9,414 |
|
|
$ |
5,332 |
|
The
benefit from (provision for) income taxes from continuing operations consisted
of the following components:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
State
|
|
$ |
(4,017 |
) |
|
$ |
(2,036 |
) |
|
$ |
(4,246 |
) |
Foreign
|
|
|
(1,965 |
) |
|
|
(387 |
) |
|
|
(380 |
) |
Current
tax (provision) benefit
|
|
|
(5,982 |
) |
|
|
(2,423 |
) |
|
|
(4,626 |
) |
U.S.
Federal
|
|
|
90,465 |
|
|
|
9,036 |
|
|
|
(2,178 |
) |
State
|
|
|
14,608 |
|
|
|
1,741 |
|
|
|
2,192 |
|
Foreign
|
|
|
203 |
|
|
|
- |
|
|
|
- |
|
Deferred
tax benefit (provision)
|
|
|
105,276 |
|
|
|
10,777 |
|
|
|
14 |
|
Income
tax benefit (provision)
|
|
$ |
99,294 |
|
|
$ |
8,354 |
|
|
$ |
(4,612 |
) |
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
The
deferred income tax assets and the deferred income tax (liabilities) resulted
from the following components:
|
|
Year-End
|
|
|
|
2008
|
|
|
2007
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Net
operating/capital loss and tax credit carryforwards
|
|
$ |
171,909 |
|
|
$ |
68,296 |
|
Accrued
compensation and related benefits
|
|
|
34,653 |
|
|
|
14,677 |
|
Unfavorable
leases
|
|
|
36,830 |
|
|
|
14,666 |
|
Other
|
|
|
77,612 |
|
|
|
33,374 |
|
Valuation
allowances
|
|
|
(80,886 |
) |
|
|
- |
|
Total
deferred tax assets
|
|
$ |
240,118 |
|
|
$ |
131,013 |
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
|
(464,945 |
) |
|
|
(18,970 |
) |
Owned
and leased fixed assets and related obligations
|
|
|
(124,727 |
) |
|
|
(31,009 |
) |
Gain
on sale of propane business
|
|
|
(34,692 |
) |
|
|
(34,503 |
) |
Other
|
|
|
(53,074 |
) |
|
|
(17,560 |
) |
Total
deferred tax liabilities
|
|
$ |
(677,438 |
) |
|
$ |
(102,042 |
) |
|
|
$ |
(437,320 |
) |
|
$ |
28,971 |
|
At
December 28, 2008, the Company’s net deferred tax liabilities totaled
$437,320. At December 30, 2007, the Company’s net deferred tax
benefits totaled $28,971. The increase in net deferred tax
liabilities is principally the result of deferred tax liabilities of the Wendy’s
merger which related to differences between the assigned values in the purchase
price allocation (see note 3) and the tax basis of the net assets acquired
partially offset by increases in deferred tax assets resulting from our
impairment of deductible goodwill and other than temporary losses to the extent
a benefit could be realized (see notes 18 and 20).
U.S.
income taxes and foreign withholding taxes are provided on undistributed
earnings of foreign subsidiaries, primarily Canadian, that are not essentially
permanent in duration. There were no undistributed earnings at
December 28, 2008.
The
Wendy’s Merger qualified as a reorganization under Section 368(a)(2)(E) of the
Internal Revenue Code. Based on the merger exchange ratio, the
former shareholders of Wendy’s own approximately 80% of the total stock of
Wendy’s/Arby’s outstanding immediately after the Wendy’s Merger.
Therefore, the Wendy’s Merger was treated as a reverse acquisition for U.S.
Federal income tax purposes. As a result of the reverse acquisition,
Wendy’s/Arby’s and its subsidiaries became part of the Wendy’s consolidated
group with Wendy’s/Arby’s as its new parent. In addition,
Wendy’s/Arby’s had a short taxable year in 2008 ending on the date of the
Wendy’s Merger. Also as a result of the Wendy’s Merger, there was an
ownership change at Wendy’s/Arby’s as defined in Section 382 of the Code
which places a limit, as defined in the Code, on the amount of a Company’s net
operating losses that can be deducted for tax purposes once there has been an
ownership change.
As of December 28, 2008,
the Company had net operating loss carryforwards for U.S. Federal income tax
purposes of approximately $318,000 which expire beginning in 2022. The
utilization of loss carryforwards in future federal income tax returns is
subject to an annual limitation of approximately $29,000 under IRC Section 382
although it could be higher in the 5 year period following the Wendy’s Merger
under certain circumstance allowed by IRC Section 382. The net
operating losses reflect deductions for federal income tax purposes of $117,939
relating to the exercise of stock options and vesting of restricted
stock. In accordance with SFAS 123(R), the Company was unable to
recognize the $42,660 tax benefit relating to these deductions because it has no
income taxes currently payable against which the benefits can be realized as a
result of its net operating loss carryforward position. When such
benefits are realized against future income taxes payable by the Company, it
will recognize them in future periods as a reduction of current income taxes
payable with an equal offsetting increase in “Additional paid-in
capital”.
Additionally,
the Company has carryforwards other than Federal net operating losses
principally consisting of:
|
1)
|
A
$209,860 capital loss resulting from Wendy’s sale of Fresh Enterprises,
Inc. & Subsidiaries “Baja Fresh” in 2006. U.S.
Federal capital losses may be carried forward for five
years.
|
|
2)
|
$18,675
of tax credits, principally consisting of foreign tax credits generated in
2008. The tax credits may be carried forward for periods of 10
years or more.
|
|
3)
|
State
net operating loss carryforwards subject to various limitations and
carryforward periods.
|
The
Company has provided deferred tax valuation allowances after reviewing available
evidence in accordance with FAS 109 including tax planning strategies that are
prudent and feasible. As of December 28, 2008, the Company had
valuation allowances of $80,886
resulting from uncertainties regarding the future realization of the capital
loss carryforward and certain of our state net operating loss
carryforwards.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
A
reconciliation of the difference between the reported benefit from (provision
for) income taxes and the respective benefit (tax) that would result from
applying the 35% U.S. Federal statutory rate to the (loss) income from
continuing operations before income taxes and minority interests is as
follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Income
tax benefit (provision) computed at U.S. Federal statutory
rate
|
|
$ |
203,306 |
|
|
$ |
(3,295 |
) |
|
$ |
(1,866 |
) |
State
income taxes, net of U.S. Federal income tax effect
|
|
|
6,884 |
|
|
|
(191 |
) |
|
|
(1,335 |
) |
Tax
benefit of foreign tax credits, net of tax on Foreign earnings
(a)
|
|
|
9,241 |
|
|
|
- |
|
|
|
- |
|
Impairment
of non-deductible goodwill (see Notes 9 and 18)
|
|
|
(99,696 |
) |
|
|
- |
|
|
|
- |
|
Loss
on DFR common stock with no tax benefit (see Notes 3 and
8)
|
|
|
(20,259 |
) |
|
|
- |
|
|
|
- |
|
Non-deductible
expenses
|
|
|
(1,921 |
) |
|
|
(2,338 |
) |
|
|
(4,872 |
) |
Adjustments
related to prior year tax matters (b)
|
|
|
(706 |
) |
|
|
2,574 |
|
|
|
(637 |
) |
Minority
interests in income of consolidated subsidiaries
|
|
|
119 |
|
|
|
939 |
|
|
|
4,033 |
|
Previously
unrecognized contingent benefit (c)
|
|
|
- |
|
|
|
12,488 |
|
|
|
- |
|
Other,
net (d)
|
|
|
2,326 |
|
|
|
(1,823 |
) |
|
|
65 |
|
|
|
$ |
99,294 |
|
|
$ |
8,354 |
|
|
$ |
(4,612 |
) |
(a)
|
Includes
previously unrecognized benefit in 2008 of foreign tax credits net of
foreign income and withholding taxes on $23,985 repatriation of foreign
earnings.
|
(b)
|
Includes
the effects of U.S. Federal and state tax examination settlements, statute
of limitations lapses, and changes in estimates used in calculating the
income tax provision.
|
(c) Represents
a previously unrecognized contingent tax benefit related to two deferred
compensation trusts (see Note 27).
(d)
|
Includes
a one-time tax charge in 2007 connected with the Company’s initiative to
simplify its corporate structure in addition to tax effects of dividend
income exclusions and AFA income (loss) with no tax effect. There were no
individually significant items in
2008.
|
The Internal Revenue Service (“IRS”) is
currently conducting an examination of the Company’s U.S. Federal income tax
return for the tax period ended December 28, 2008 as part of the Compliance
Assurance Program (“CAP”). Our December 28, 2008 U.S. Federal income
tax return includes Wendy’s for all of 2008 and Wendy’s/Arby’s for the period
September 30, 2008 to December 28, 2008. Wendy’s/Arby’s U.S.
Federal income tax returns for periods ending January 1, 2006 to September 29,
2008 are not currently under examination. Wendy’s has been
participating in the IRS’s CAP since the tax year ending December 31,
2006. The Wendy’s Federal income tax returns for 2007 and prior
years have been settled. The CAP program has been extended by the IRS
and Wendy’s for 2008. As part of the CAP program, tax returns are
audited on a contemporaneous basis so that all or most issues are resolved prior
to the filing of the tax return. The 2008 agreement with the IRS will
include Wendy’s for all of 2008 and the Company for the period September 30,
2008 to December 28, 2008.
Certain
of the Company’s state income tax returns from its 1998 fiscal year and forward
remain subject to examination. Various state income tax returns are
currently under examination.
FIN
48
The Company adopted the provisions of
FIN 48 on January 1, 2007. As a result of the adoption of FIN 48, the
Company increased its liability for unrecognized tax benefits to $13,157, or an
increase of $4,820. Additionally, the Company recognized an increase in its
liability for interest of $487 and penalties of $247 related to uncertain income
tax positions, both partially offset by an increase in its deferred income tax
benefit of $3,200 and a reduction in the tax related liabilities of discontinued
operations of $79, with the net effect of $2,275 accounted for as a decrease to
the January 1, 2007 balance of retained earnings. A reconciliation of
the beginning and ending amount of unrecognized tax benefits is as
follows:
|
|
2008
|
|
|
2007
|
|
Beginning
balance
|
|
$ |
12,266 |
|
|
$ |
13,157 |
|
Additions:
|
|
|
|
|
|
|
|
|
Wendy’s
unrecognized tax benefits at the Wendy’s Merger date
|
|
|
16,816 |
|
|
|
- |
|
Tax
positions related to the current year
|
|
|
996 |
|
|
|
387 |
|
Tax
positions of prior years
|
|
|
4,362 |
|
|
|
108 |
|
Reductions:
|
|
|
|
|
|
|
|
|
Tax
positions of prior years
|
|
|
(2,982 |
) |
|
|
(976 |
) |
Settlements
|
|
|
(578 |
) |
|
|
(72 |
) |
Lapse
of statute of limitations
|
|
|
(559 |
) |
|
|
(338 |
) |
Ending
balance
|
|
$ |
30,321 |
|
|
$ |
12,266 |
|
Included in the balance of
unrecognized tax benefits at December 28, 2008 and December 30, 2007
respectively, are $22,155 and $9,482 (net of U.S. Federal benefit on state
issues) of tax benefits that, if resolved favorably would reduce the Company’s
tax expense.
During 2009, the Company believes it
is reasonably possible it will reduce unrecognized tax benefits by up to $8,500,
primarily as a result of the completion of certain state tax
audits. Any increases in unrecognized tax benefits will result
primarily from state tax positions expected to be taken on tax returns for
2009. As a result of our participation in the CAP program described
above, the Company has no unrecognized tax benefits related to its U.S. Federal
income tax for the period ended December 28, 2008.
The Company recognizes interest
accrued related to unrecognized tax benefits in “Interest expense” and penalties
in “General and administrative expenses”. As a result of the
implementation of FIN 48, the Company recognized a $487 increase in the
liability for interest and a $247 increase in the liability for penalties which
was a reduction to the January 1, 2007 balance of retained
earnings. During 2008 and 2007 the Company recognized $390 and $1,619
of interest expense and $1,307 and $0 of penalties, both respectively related to
uncertain tax positions. The Company has approximately $6,157 and
$3,328 accrued for interest and $1,914 and $247 accrued for penalties as of
December 28, 2008 and December 30, 2007, both respectively.
Discontinued
Operations
The
Company includes unrecognized tax benefits and related interest and penalties
for discontinued operations in “Liabilities related to discontinued operations”
in the accompanying consolidated balance sheets. During 2008 and
2007, certain state tax matters of discontinued operations were either settled
or the statute of limitations for examination expired. In connection
with these matters, the Company recognized income tax benefits and released
related interest and penalty accruals of $1,701, $1,144 and $688 in
2008, 2007 and 2006, respectively, included in “Income (loss) from discontinued
operations” in the accompanying consolidated statements of
operations. At December 28, 2008, the Company has unrecognized tax
benefits, interest and penalties of $3,633 for state tax matters related to
discontinued operations. If these tax benefits were to be recognized,
they would affect the gain or loss on disposal of discontinued
operations.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
As
discussed in Note 3, in connection with the September 29, 2008 Wendy’s Merger,
Wendy’s/Arby’s stockholders approved a charter amendment to convert each of the
then existing Triarc Class B common stock into one share of Wendy’s/Arby’s Class
A common stock (the “Conversion”). Prior to the merger date, there
were no changes in the 29,551 issued shares of Class A common stock during the
periods presented below. As of the date of the Wendy’s Merger, 376,776 shares of
Wendy’s/Arby’s Class A common stock were issued to Wendy’s
shareholders. Subsequent to the merger, we only have Class A common
stock; therefore, the summarized activity in the table below presents Class A
common stock subsequent to the date of the Wendy’s Merger in 2008 and Class B
common stock from 2006 through the date of the Wendy’s Merger. Our
common stock and common stock held in treasury activity for 2008, 2007 and 2006
is as follows:
|
|
Common
Stock
|
|
|
Treasury
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
B prior to September 29, 2008
Class
A subsequent to September 29, 2008
|
|
|
Class
A
|
|
|
Class
B
|
|
|
Class
A
|
|
|
Class
B
|
|
|
Class
A
|
|
Class
B
|
Number
of shares at beginning of year
|
|
|
64,025 |
|
|
|
63,656 |
|
|
|
59,101 |
|
|
|
667 |
|
|
|
174 |
|
|
|
805 |
|
|
|
486 |
|
|
|
6,192 |
|
|
8,216 |
Net
effect of combining Class B common stock and Class A common stock
presentation
|
|
|
29,551 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issuance related to Wendy’s Merger. (Note 3)
|
|
|
376,776 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
- |
Common
shares issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upon
exercises of stock options (Note 16)
|
|
|
- |
|
|
|
329 |
|
|
|
11,394 |
|
|
|
(5 |
) |
|
|
- |
|
|
|
(43 |
) |
|
|
(190 |
) |
|
|
(3,494 |
) |
|
(257 |
In
connection with the Convertible Notes Conversions (Note
10)
|
|
|
- |
|
|
|
- |
|
|
|
1,623 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,323 |
) |
|
(7,320 |
Upon
vesting of restricted stock (Note 16)
|
|
|
8 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(99 |
) |
|
|
(482 |
) |
|
|
(50 |
) |
|
(243 |
For
time-vesting restricted stock (Note 16)
|
|
|
7 |
|
|
|
226 |
|
|
|
- |
|
|
|
(48 |
) |
|
|
(211 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
- |
For
directors’ fees
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
(15 |
) |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(1 |
) |
|
|
(3 |
) |
|
(1 |
Common
shares received or withheld:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
payment in connection with exercises of stock options (Notes 16 and
27)
|
|
|
- |
|
|
|
(152 |
) |
|
|
(6,464 |
) |
|
|
- |
|
|
|
- |
|
|
|
6 |
|
|
|
114 |
|
|
|
1,720 |
|
|
2 |
For
forfeitures of restricted stock
|
|
|
8 |
|
|
|
- |
|
|
|
- |
|
|
|
28 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
payment for withholding taxes on capital stock transactions (Notes 16 and
27)
|
|
|
- |
|
|
|
(34 |
) |
|
|
(1,998 |
) |
|
|
591 |
|
|
|
25 |
|
|
|
1 |
|
|
|
247 |
|
|
|
763 |
|
|
89 |
Other
|
|
|
48 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
- |
Number
of shares at end of year
|
|
|
470,424 |
|
|
|
64,025 |
|
|
|
63,656 |
|
|
|
1,220 |
|
|
|
- |
|
|
|
667 |
|
|
|
174 |
|
|
|
805 |
|
|
486 |
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
Adjustments
to Beginning Retained Earnings
As
disclosed in Note 1, the SEC issued SAB 108 during 2006, which was adopted by
the Company as of December 31, 2006. Prior to adopting SAB 108, the
Company used only the Rollover approach to quantify unrecorded adjustments and
considered all unrecorded adjustments to be immaterial. However, when
quantifying unrecorded adjustments under the Iron Curtain approach, the Company
concluded that one of the unrecorded adjustments resulting from income deferred
in years prior to 2004 was material. Additionally, when applying this
Iron Curtain approach the Company identified two accruals provided in years
prior to 2004 that were also no longer required although not
material. The Company previously recorded the cumulative effect of
these unrecorded adjustments, one of which was then considered to be material,
as an adjustment increasing retained earnings as of the beginning of 2006, as
permitted under the transition provisions of SAB 108.
The
nature of the adjustments and the impact of each on the Company’s consolidated
retained earnings as of January 2, 2006 are presented below:
|
|
Pre-Tax
Adjustment
|
|
|
Income
Tax Effect
|
|
|
Retained
Earnings
|
|
Deferred
gain from sale of businesses (a)
|
|
$ |
5,780 |
|
|
$ |
(2,087 |
) |
|
$ |
3,693 |
|
Hurricane
insurance proceeds (b)
|
|
|
1,374 |
|
|
|
(495 |
) |
|
|
879 |
|
Self-insurance
reserves (c)
|
|
|
965 |
|
|
|
(347 |
) |
|
|
618 |
|
|
|
$ |
8,119 |
|
|
$ |
(2,929 |
) |
|
$ |
5,190 |
|
(a)
|
During
the mid-1990’s the Company sold the assets and liabilities of certain
non-strategic businesses, four of which did not qualify for accounting as
discontinued operations. At the time of the sale of each of
these four businesses, the gain was deferred either because of (1)
uncertainties associated with realization of non-cash proceeds, (2)
contingent liabilities resulting from selling assets and liabilities of
the entity or associated with litigation or (3) possible losses or asset
write-downs that might result related to additional businesses anticipated
to be sold. If the criteria in SAB 108 were applied, these
deferred gains would have been recognized in results of operations prior
to 2003.
|
(b)
|
The
Company received insurance proceeds in 1993 in connection with hurricane
damage to its then corporate office building. The gain
otherwise associated with the insurance proceeds was not initially
recognized due to contingencies with respect to on-going litigation with
the landlord of the office building. If the criteria in SAB 108
were applied, these proceeds should have been recorded as a gain prior to
2003 once the litigation was
settled.
|
(c)
|
Prior
to 2000 the Company self-insured certain of its medical
programs. Reserves set up were ultimately determined to be in
excess of amounts required based on claims experience. If the
criteria in SAB 108 were applied, these liabilities should have been
reversed prior to 2003 once the liabilities were determined to be in
excess of the reserves required.
|
As
discussed in Note 14, the Company adopted FIN 48 on January 1,
2007. As a result of the adoption, the Company previously recorded a
reduction of retained earnings as of the beginning of 2007.
Preferred
Stock
There
were 100,000 shares authorized and no shares issued of preferred stock
throughout the 2008, 2007 and 2006 fiscal years.
The
Company maintains several equity plans (the “Equity Plans”), including those
assumed in the Wendy’s Merger discussed below, which collectively provide or
provided for the grant of stock options, restricted shares of Wendy’s/Arby’s
common stock, tandem stock appreciation rights and restricted share units to
certain officers, other key employees, non-employee directors and consultants,
although the Company has not granted any tandem stock appreciation rights or
restricted share units. The Equity Plans
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
also
provide for the grant of shares of Wendy’s/Arby’s common stock to non-employee
directors. As of December 28, 2008 there were approximately 19,500
shares of Class A Common Stock available for future grants under the Equity
Plans, including shares available under the plans assumed in the Wendy’s Merger
discussed below. The Company has also granted certain Equity Interests to
certain officers and key employees as described in Note 1 and
below.
Effective
with the Wendy’s Merger, Wendy’s/Arby’s also assumed the existing Wendy’s equity
plans (the “Wendy’s Plans”) which collectively provided for the grant of stock
options, restricted shares, stock appreciation rights or restricted stock units
for certain employees and non-employee directors to acquire common shares of
Wendy’s. Pursuant to the merger agreement, each outstanding Wendy’s
option as of the merger date was converted into 4.25 options for one share of
Wendy’s/Arby’s Class A Common Stock. We performed valuations on the
Wendy’s options both before and after the Conversion and determined that the
value of the options after the Conversion was $1,923 higher than the pre-merger
value included in the consideration in the Wendy’s Merger (see Note
3). As such, we recorded additional compensation expense in 2008 for
this amount. The total value of the Wendy’s options after the
Conversion, including the $1,923 mentioned above, was $18,896. This
amount differs from the Wendy’s stock option value used in the purchase
accounting adjustment to goodwill (see Note 3) because that value of $18,495 was
calculated as of the announcement date of the Wendy’s Merger.
Stock
Options
Prior to
the date of the Conversion, our outstanding stock options were exercisable for
either (1) a package (the “Package Options”) of one share of Class A Common
Stock and two shares of Class B Common Stock, (2) one share of Class A Common
Stock (the “Class A Options”) or (3) one share of Class B Common Stock (the
“Class B Options”). As of the date of the Wendy’s Merger, as
discussed in Note 3, we converted to a single class of common
stock. As such, all stock options outstanding as of December 28, 2008
(including those under the Wendy’s Plans) are now exercisable for one share of
Class A Common Stock (three shares of Class A Common Stock for Package
Options). Summary information regarding Wendy’s/Arby’s outstanding
stock options, including changes therein, is as follows:
|
|
Package
Options
|
|
|
Class
A Options
|
|
|
Class
B Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
|
Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
|
Options
|
|
|
Weighted
Average Exercise Price
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
at January 1, 2006
|
|
|
2,548 |
|
|
|
23.39 |
|
|
|
|
|
|
|
1,300 |
|
|
|
16.55 |
|
|
|
|
|
|
|
9,388 |
|
|
|
13.96 |
|
|
|
|
Granted
during 2006
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
116 |
|
|
|
20.20 |
|
|
|
|
|
|
|
1,899 |
|
|
|
16.85 |
|
|
|
|
Exercised
during 2006
|
|
|
(2,280 |
) |
|
|
21.88 |
|
|
$ |
86,304 |
|
|
|
(1,214 |
) |
|
|
16.33 |
|
|
$ |
5,839 |
|
|
|
(7,090 |
) |
|
|
14.28 |
|
$ |
35,453 |
Forfeited
during 2006
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
(242 |
) |
|
|
13.79 |
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
268 |
|
|
|
23.89 |
|
|
|
|
|
|
|
202 |
|
|
|
17.06 |
|
|
|
|
|
|
|
3,955 |
|
|
|
13.76 |
|
|
|
|
Granted
during 2007
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
16.40 |
|
|
|
|
|
|
|
1,026 |
|
|
|
15.82 |
|
|
|
|
Exercised
during 2007
|
|
|
(43 |
) |
|
|
23.11 |
|
|
$ |
1,269 |
|
|
|
- |
|
|
|
|
|
|
$ |
- |
|
|
|
(432 |
) |
|
|
12.38 |
|
$ |
2,697 |
Forfeited
during 2007
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
(33 |
) |
|
|
21.45 |
|
|
|
|
|
|
|
(222 |
) |
|
|
16.68 |
|
|
|
|
Outstanding
at December 30, 2007
|
|
|
225 |
|
|
|
24.04 |
|
|
$ |
657 |
|
|
|
201 |
|
|
|
16.22 |
|
|
$ |
- |
|
|
|
4,327 |
|
|
|
14.24 |
|
$ |
1,692 |
Conversion
of Class B Options to Class A Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,902 |
|
|
|
12.99 |
|
|
|
|
|
|
|
(4,902 |
) |
|
|
12.99 |
|
|
|
|
Options
assumed with the Wendy’s Merger
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
16,341 |
|
|
|
6.68 |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
Granted
during 2008
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
5,549 |
|
|
|
5.08 |
|
|
|
|
|
|
|
741 |
|
|
|
6.60 |
|
|
|
|
Exercised
during 2008
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
3.35 |
|
|
$ |
4 |
|
|
|
- |
|
|
|
|
|
$ |
- |
Forfeited
during 2008
|
|
|
(15 |
) |
|
|
25.26 |
|
|
|
|
|
|
|
(895 |
) |
|
|
6.63 |
|
|
|
|
|
|
|
(166 |
) |
|
|
13.43 |
|
|
|
|
Outstanding
at December 28, 2008
|
|
|
210 |
|
|
|
23.54 |
|
|
$ |
- |
|
|
|
26,093 |
|
|
|
7.60 |
|
|
$ |
2,557 |
|
|
|
- |
|
|
|
|
|
|
|
|
Vested
or expected to vest at December 28, 2008 (a)
|
|
|
210 |
|
|
|
23.54 |
|
|
$ |
- |
|
|
|
23,783 |
|
|
|
7.67 |
|
|
|
2,501 |
|
|
|
- |
|
|
|
|
|
|
|
|
Exercisable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
268 |
|
|
|
23.89 |
|
|
|
|
|
|
|
148 |
|
|
|
17.33 |
|
|
|
|
|
|
|
2,315,396 |
|
|
|
12.43 |
|
|
|
|
December
30, 2007
|
|
|
225 |
|
|
|
24.04 |
|
|
|
|
|
|
|
153 |
|
|
|
16.11 |
|
|
|
|
|
|
|
2,457,326 |
|
|
|
12.90 |
|
|
|
|
December
28, 2008
|
|
|
210 |
|
|
|
23.54 |
|
|
$ |
- |
|
|
|
12,451 |
|
|
|
8.60 |
|
|
$ |
2,229 |
|
|
|
- |
|
|
|
- |
|
|
N/A |
(a)
|
The
weighted average remaining contractual terms for the Package Options and
Class A Options that are vested or are expected to vest at December 28,
2008 are 2.9 years and 8.3 years,
respectively.
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
The
weighted average fair value per share as of the grant date as calculated under
the Black-Scholes Model of the Company’s stock options granted during 2008, 2007
and 2006, which were granted at exercise prices equal to the market price of the
Company’s common stock on the grant date were as follows:
|
|
Class
A Options
|
|
|
Class
B Options
|
|
2008
|
|
|
2.12 |
|
|
|
2.20 |
|
2007
|
|
|
4.57 |
|
|
|
4.52 |
|
2006
|
|
|
3.37 |
|
|
|
4.79 |
|
The fair
value of the Company’s stock options on the date of grant and as of the merger
date for options assumed was calculated under the Black-Scholes Model with the
weighted average assumptions set forth as follows:
|
2008
|
|
2007
|
|
2006
|
|
Class
A Options
|
|
Class
B Options
|
|
Class
A Options
|
|
Class
B Options
|
|
Class
A Options
|
|
Class
B Options
|
Risk-free
interest rate
|
2.13%
|
|
3.78%
|
|
4.88%
|
|
4.69%
|
|
4.83%
|
|
4.90%
|
Expected
option life in years
|
6.2
|
|
7.5
|
|
8.4
|
|
7.5
|
|
3.8
|
|
6.9
|
Expected
volatility
|
47.0%
|
|
36.0%
|
|
20.9%
|
|
26.5%
|
|
20.9%
|
|
27.4%
|
Expected
dividend yield
|
1.29%
|
|
2.53%
|
|
2.01%
|
|
2.38%
|
|
2.00%
|
|
2.42%
|
The
risk-free interest rate represents the U.S. Treasury zero-coupon bond yield
approximating the expected option life of stock options granted during the
respective years. The expected option life represents the period of
time that the stock options granted during the period are expected to be
outstanding based on the Company’s historical exercise trends for similar
grants. The expected volatility is based on the historical market
price volatility of the classes of common stock for the related options granted
during the years. The expected dividend yield represents the
Company’s annualized average yield for regular quarterly dividends declared
prior to the respective stock option grant dates.
The
Black-Scholes Model has limitations on its effectiveness including that it was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable and that the model requires the
use of highly subjective assumptions including expected stock price
volatility. The Company’s stock option awards to employees have
characteristics significantly different from those of traded options and changes
in the subjective input assumptions can materially affect the fair value
estimates.
As of
December 28, 2008, there was $16,408 of total unrecognized compensation cost
related to nonvested share-based compensation grants which would be recognized
over a weighted-average period of 2.6 years. The Company’s currently
outstanding stock options have maximum contractual terms of ten years and, with
certain exceptions, vest ratably over three years. All of the options
under the Wendy’s Plans that were granted prior to 2008 vested immediately as of
the date of the Wendy’s Merger. Options granted under the Wendy’s
Plans during 2008, regardless of whether they were granted before or after the
merger, vest ratably over three years from the date of grant, with certain
exceptions.
All
discussions below related to option activity for prior years include a
discussion of the then available Class B Common Stock or options which, if they
were still outstanding as of the date of the Wendy’s Merger, have been converted
to Class A Common Stock or options exercisable into Class A Common
Stock.
The
Company reduced the exercise prices of all outstanding stock options for the DFR
dividend distributed to shareholders of record as of March 29, 2008 (see Note
3). The exercise prices were reduced by $0.39 for each of the Package
Options and by $0.13 for each of the Class A Options and Class B
Options.
The
Company reduced the exercise prices of all outstanding stock options for each of
three special cash dividends of $0.15 for each share of Class A and Class B
Common Stock effective as of the ex-dividend dates, on December 14,
2006. The exercise prices were reduced by $0.45 for each of the
Package Options and by $0.15 for each of the Class A Options and Class B Options
on each of the ex-dividend dates of February 15, 2006, June 28, 2006 and
December 1, 2006, resulting in maximum adjustments to the exercise prices of
$1.35 for each of the Package Options and $0.45 for each of the Class A Options
and Class B Options. Those option holders who exercised stock options
prior to December 14, 2006, but subsequent to the respective ex-dividend dates,
received cash payments by the Company aggregating $125, effectively representing
retroactive adjustments to the exercise prices which had not yet been reflected
upon the exercise of such stock options. Such reduction of the
exercise prices of the stock options did not result in any compensation expense
to the Company since the fair value of the options immediately after each of the
adjustments was less than the fair value immediately before the
adjustments.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
On
December 14, 2006 the Company also amended all outstanding stock options under
the Equity Plans by permitting optionees to pay both the exercise price and
applicable minimum statutory withholding taxes by having the Company withhold
shares that would have been issued to the optionee upon exercise (the “Net
Exercise Features”). By utilizing the Net Exercise Features, an
optionee would not be required to tender the purchase price or applicable
withholding taxes of the shares being acquired under the option in cash, but
rather, upon exercise, the optionee receives only such numbers of shares as is
equal in value to the excess of the aggregate fair market value of the shares
being purchased, based on the closing price of the Company’s stock on the
exercise date, over the aggregate exercise price and applicable withholding
taxes for those shares. The Net Exercise Features are permitted under SFAS
123(R) and, accordingly, such amendment did not result in any compensation
expense to the Company. The shares withheld from exercises of stock
options under the Net Exercise Features in 2006, 2007, and 2008 are included in
“Common shares received or withheld as payment in connection with exercises of
stock options” and “Common shares withheld as payment for withholding taxes on
capital stock transactions” in the table which summarizes changes in shares of
common stock and common stock held in treasury in Note 15 and, for presentation
purposes, have not been offset within “Common shares issued upon exercises of
stock options” in that table.
Pursuant
to other agreements the Company entered into for its own tax planning reasons,
on December 21, 2006 two of the Company’s then senior executive officers (the
“Former Senior Officers”) other than the Chairman and then Chief Executive
Officer and the Vice Chairman and then President and Chief Operating Officer of
the Company (the “Former Executives”) exercised an aggregate 131 Package Options
and 215 Class B Options utilizing the Net Exercise Features. The
Company withheld 84 and 353 shares of its Class A and Class B Common Stock,
respectively, otherwise issuable in connection with the stock option exercises
to satisfy the Former Senior Officers’ exercise prices and applicable minimum
statutory withholding taxes. On December 21, 2006 the Company then
granted the Former Senior Officers an aggregate 84 and 353 Class A Options and
Class B Options, respectively, to compensate the Former Senior Officers for the
unintended economic disadvantage relative to future price appreciation from the
shares of the Company’s Class A and Class B Common Stock withheld by the Company
to satisfy the exercise prices and withholding taxes. The newly
granted options, which were granted with exercise prices equal to the closing
market prices of the Company’s Class A and Class B Common Stock of $21.45 and
$19.55, respectively, on December 21, 2006, were fully vested at the grant date
and had the same expiration dates as the corresponding exercised
options. The Company recognized compensation expense of $1,758 during
the year ended December 31, 2006 related to such options granted on December 21,
2006 representing the fair value of such awards. During 2007, 33 and
67 of these Class A Options and Class B Options, respectively, expired
unexercised.
The
Company was obligated to grant 100 restricted shares of the Company’s Class B
Common Stock to its current Chief Executive Officer (the “CEO”) and also then
Chief Executive Officer of Arby’s in accordance with the terms of an employment
agreement effective April 13, 2006. Such restricted shares (the “2006
Restricted Shares”) have both time vesting targets (67 shares) and performance
vesting targets (33 shares). As the performance vesting targets had
not been agreed upon by December 31, 2006, pursuant to the CEO’s employment
agreement, the Company could have been obligated to grant stock options to the
CEO having a fair value equal to the market price of 100 restricted shares of
the Company’s Class B Common Stock as of the April 13, 2006 date of commencement
of the employment term. The total fair value of such stock options
would have aggregated $1,692 and would have been recognized ratably as
compensation expense over the three-year vesting period which would have
commenced retroactively as of April 13, 2006 had such options been issued
instead of the restricted shares resulting in compensation expense of $742
during the year ended December 31, 2006. As such, the Company
recognized $742 as its estimate of the minimum related compensation expense
during the year ended December 31, 2006 for the 2006 Restricted
Shares. The performance targets were agreed upon during 2007 and the
Company recognized compensation expense of $66 and $495 during the years ended
December 28, 2008 and December 30, 2007, respectively, related to the 2006
Restricted Shares. During 2008 and 2007, respectively, 17 and
33 shares of the time vesting shares vested on the anniversary of the
date of commencement. In addition, during 2008, 8 shares of the
performance vesting shares vested as a result of meeting 50% of the performance
vesting targets set for 2007. The remaining 8 shares related to 2007
performance were forfeited in 2008 due to the fact that the performance targets
were not fully met in 2007 and were not anticipated to be met in
2008. In addition, the Company is not recognizing compensation
expense on the remaining 17 performance shares available for 2008 due to the
fact that the performance targets were not met. These shares will be
forfeited in 2009.
2005
Restricted Shares
On March
14, 2005, the Company granted certain officers and key employees 149 and 731
contingently issuable performance-based restricted shares of Class A Common
Stock and Class B Common Stock (the “2005 Restricted Shares”), respectively,
under one of its Equity Plans (See Note 1). The 2005 Restricted
Shares initially vested ratably over three years, subject to meeting, in each
case, certain increasing Class B Common Share market price targets of between
$12.09 and $16.09 per share, or to the extent not previously vested, on March
14, 2010 subject to meeting a Class B Common Share market price target of $18.50
per share. Prior to 2006, no shares vested but 1 share had been
cancelled. On March 14, 2006, the closing market price of the Class B
Common Stock met the market price target, resulting in the vesting of one-third
of the then outstanding 2005 Restricted Shares, less 1 share which was cancelled
in 2006. On March 14, 2007, the closing market price of the Class B
Common Stock met the market price target, resulting in the vesting of one-third
of the then outstanding 2005 Restricted Shares, less 3 shares which were
cancelled. On June 29, 2007, the
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
Performance
Compensation Subcommittee of the Company’s Board of Directors, in connection
with a corporate restructuring (see Note 17), approved the vesting of the
remaining one-third of the then outstanding 2005 Restricted Shares. Prior to
January 2, 2006, the Company’s 2005 Restricted Shares were accounted for as
variable plan awards since they vested only if the Company’s Class B Common
Stock met certain market price targets. The Company measured
compensation cost for its 2005 Restricted Shares by estimating the expected
number of shares that would ultimately vest based on the market price of its
Class B Common Stock at the end of the year. Based on the market
prices of the Company’s Class A and Class B Common Stock as of January 1, 2006,
the Company recognized aggregate unearned compensation of $11,602 in the
“Unearned compensation” component of “Stockholders’ equity” with an equal
offsetting increase in “Additional paid-in capital.” Such unearned
compensation was recognized ratably as compensation expense over the vesting
period of the related 2005 Restricted Shares and prior to the adoption of SFAS
123(R) was adjusted retrospectively based on the market price of the Class B
Common Stock at the end of each period through January 1, 2006. Upon
adoption of SFAS 123(R) effective January 2, 2006, the Company reversed the
related unamortized “Unearned compensation” balance of $5,551 with an equal
offsetting reduction of “Additional paid-in capital” and commenced recognizing
the remaining fair value of the 2005 Restricted Shares of $6,535, based on the
original March 14, 2005 grant date fair value, as compensation expense ratably
over the remaining vesting periods through the June 29, 2007 accelerated vesting
date, with an equal offsetting increase in “Additional paid-in
capital.”
2007
Restricted Shares
On May
23, 2007, the Company granted certain officers and key employees, other than our
current Chief Executive Officer, 159 restricted shares (the “2007 Restricted
Shares”) of Class B Common Stock under one of its Equity Plans. The
2007 Restricted Shares vest ratably over three years, subject to continued
employment through each of the anniversary dates. The price of the
Company’s Class B Common Stock on the May 23, 2007 grant date was $15.84 and the
resulting grant-date fair value is being recognized as compensation expense
ratably over the vesting periods net of an anticipated amount of
forfeitures. For 2008 and 2007, the compensation expense recognized
relating to the 2007 Restricted Shares was $742 and $763,
respectively. In 2008, 19 shares were forfeited and 52 shares
vested. No 2007 Restricted Shares were forfeited or vested during
2007.
2008
Restricted Shares
On June
18, 2008 the Company granted certain officers and key employees, other than our
current Chief Executive Officer, 48 restricted shares of Class A Common
Stock and 218 restricted shares of Class B Common Stock (collectively, the “2008
Restricted Shares”) under one of its Equity Plans. The 2008
Restricted Shares vest ratably over three years, subject to continued employment
through each of the anniversary dates. The prices of the Company’s
Class A Common Stock and Class B Common Stock on the June 18, 2008 grant date
were $6.77 and $6.76, respectively, and the resulting grant-date fair value
is being recognized as compensation expense ratably over the vesting periods net
of an anticipated amount of forfeitures. For 2008, the
compensation expense recognized relating to the 2008 Restricted Shares was
$439. No 2008 Restricted Shares vested during 2008 and 17 Class B
Common Stock shares were forfeited.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
A summary
of changes in the Company’s nonvested 2008 Restricted Shares, 2007 Restricted
Shares and 2005 Restricted Shares is as follows:
|
|
2008
Grant
|
|
|
2007
Grant
|
|
|
2005
Grant
|
|
|
|
Class
A Common Stock
|
|
|
Class
B Common Stock
|
|
|
Class
B Common Stock
|
|
|
Class
A Common Stock
|
|
|
Class
B Common Stock
|
|
|
|
Shares
|
|
|
Grant
Date Fair Value
|
|
|
Shares
|
|
|
Grant
Date Fair Value
|
|
|
Shares
|
|
|
Grant
Date Fair Value
|
|
|
Shares
|
|
|
Grant
Date Fair Value
|
|
|
Shares
|
|
|
Grant
Date Fair Value
|
|
Nonvested
at January 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149 |
|
|
$ |
15.59 |
|
|
|
730 |
|
|
$ |
14.75 |
|
Vested
during 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50 |
) |
|
|
15.59 |
|
|
|
(243 |
) |
|
|
14.75 |
|
Forfeited
during 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
(1 |
) |
|
|
14.75 |
|
Nonvested
at December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99 |
|
|
|
15.59 |
|
|
|
486 |
|
|
|
14.75 |
|
Granted
during 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159 |
|
|
$ |
15.84 |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Vested
during 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
(99 |
) |
|
|
15.59 |
|
|
|
(482 |
) |
|
|
14.75 |
|
Forfeited
during 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
(4 |
) |
|
|
14.75 |
|
Nonvested
at December 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159 |
|
|
|
15.84 |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Granted
during 2008
|
|
|
48 |
|
|
$ |
6.77 |
|
|
|
218 |
|
|
$ |
6.76 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
during 2008
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
(52 |
) |
|
|
15.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
during 2008
|
|
|
- |
|
|
|
|
|
|
|
(17 |
) |
|
|
6.76 |
|
|
|
(19 |
) |
|
|
15.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested
at December 28, 2008
|
|
|
48 |
|
|
$ |
6.77 |
|
|
|
201 |
|
|
$ |
6.76 |
|
|
|
88 |
|
|
$ |
15.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total
fair value of 2005 Restricted Shares which vested during 2007 and 2006 was
$9,683 and $4,936, respectively, as of the accelerated June 29, 2007, and the
March 14, 2007 and March 14, 2006 vesting dates. The total fair value
of 2007 Restricted Shares which vested during 2008 was $356 as of the May 23,
2008 vesting date.
Equity
Instruments of Subsidiaries
Deerfield
had granted membership interests in future profits (the “Profit Interests”) to
certain of its key employees prior to 2006 for which no payments were required
from the employees to acquire the Profit Interests. The estimated
fair market value at the date of grant of the Profit Interests was $2,050 in
accordance with their fair market value and represented the probability-weighted
present value of estimated future cash flows to those Profit
Interests. This estimated fair market value resulted in aggregate
unearned
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
compensation
of $1,260, net of minority interests, being charged to the “Unearned
compensation” component of “Stockholders’ equity” with an equal offsetting
increase in “Additional paid-in capital” at the date of grant. The
scheduled vesting of the Profit Interests varied by employee either vesting
ratably in each of the three years ended August 20, 2007, 2008 and 2009 or 100%
on August 20, 2007. This unrecognized compensation cost was recorded
as compensation expense as earned over periods of three or five
years. Upon adoption of SFAS 123(R) effective January 2, 2006, the
Company reversed the related unamortized “Unearned compensation” balance of
$743, net of minority interests, with an equal offsetting reduction of
“Additional paid-in capital” and recognized the remaining fair value of the
Profit Interests as compensation expense, less minority interests, ratably over
the remaining vesting periods, with an equal offsetting increase in “Additional
paid-in capital.” The vesting of the portion of the Profit Interests scheduled
to vest on February 15, 2008 was accelerated in connection with the corporate
restructuring (see Note 17) and the remaining unamortized balance was recognized
as compensation expense in 2007.
Prior to
2006, the Company granted to certain members of its then management equity
interests (the “Class B Units” and together with the Profits Interests, the
“Equity Interests”) in TDH and Jurl which held or hold the Company’s respective
interests in Deerfield and Jurlique as applicable. The Class B Units
consist of a capital interest portion reflecting the subscription price paid by
each employee, which aggregated $600, and a profits interest portion of up to
15% of the equity interest of those subsidiaries in the respective net income of
Deerfield and Jurlique and up to 15% of any investment gain derived from the
sale of any or all of their equity interests in Deerfield or
Jurlique. The grant of the Class B Units resulted in aggregate
unearned compensation of $10,880, net of minority interests, being charged to
the “Unearned compensation” component of “Stockholders’ equity” at the grant
date. The unearned compensation represented the excess of the
estimated fair market value of the Class B Units as of the date of grant, which
reflected the probability-weighted present value of estimated future cash flows
to the Class B Units, over the $600 aggregate subscription price paid by the
employees. The profits interest portion of the Class B Units vested
ratably on each of February 15, 2006, 2007 and 2008. Accordingly, the
unrecognized compensation cost was being recognized ratably as compensation
expense over the three-year vesting period. Upon adoption of SFAS 123(R)
effective January 2, 2006, the Company reversed the related unamortized
“Unearned compensation” balance of $5,038 with an equal offsetting reduction of
“Additional paid-in capital” and recognized the remaining fair value of the
Class B Units as compensation expense, less minority interests, ratably over the
remaining vesting periods, with an equal offsetting increase in “Additional
paid-in capital.” On June 29, 2007, the Performance Compensation
Subcommittee of the Company’s Board of Directors, in connection with the
corporate restructuring (see Note 17), approved the vesting of the remaining
portion of the Profit Interests and the remaining unamortized balance was
recognized as compensation expense in 2007.
The
aggregate estimated fair value of the Equity Interests which vested, including
the amount related to the accelerated vesting, during 2006 and 2007 were $3,633
and $2,240, respectively.
Share-Based
Compensation Expense
Total
share-based compensation expense and related income tax benefit and minority
interests recognized in the Company’s consolidated statements of operations were
as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Compensation
expense related to stock options
|
|
$ |
5,953 |
|
|
$ |
4,271 |
|
|
$ |
7,500 |
|
Compensation
expense related to the effect of the Conversion on Wendy’s stock
options
|
|
|
1,923 |
|
|
|
- |
|
|
|
- |
|
Compensation
expense related to Restricted Shares
|
|
|
1,247 |
|
|
|
3,479 |
|
|
|
4,363 |
|
Compensation
expense related to the Equity Interests
|
|
|
- |
|
|
|
2,240 |
|
|
|
4,026 |
|
Compensation
expense credited to “Stockholders’ Equity”
|
|
|
9,123 |
|
|
|
9,990 |
|
|
|
15,889 |
|
Compensation
expense related to dividends and related interest on the 2005, 2007 and
2008 Restricted Shares (a)
|
|
|
6 |
|
|
|
26 |
|
|
|
39 |
|
Total
share-based compensation expense included in “General and
administrative”
|
|
|
9,129 |
|
|
|
10,016 |
|
|
|
15,928 |
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
|
(3,363 |
) |
|
|
(2,946 |
) |
|
|
(4,436 |
) |
Minority
interests
|
|
|
- |
|
|
|
(233 |
) |
|
|
(249 |
) |
Share-based
compensation expense, net of related income taxes and minority
interests
|
|
|
5,766 |
|
|
$ |
6,837 |
|
|
$ |
11,243 |
|
(a)
|
In accordance with SFAS 123(R),
dividends of $65, $148 and $551 that accrued on the 2008, 2007 and 2005
Restricted Shares were charged to “Retained earnings” in 2008, 2007 and
2006, respectively.
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
The
facilities relocation and corporate restructuring charges are summarized
below:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Wendy’s
Restaurants segment
|
|
$ |
3,101 |
|
|
$ |
- |
|
|
$ |
- |
|
Arby’s
Restaurants segment
|
|
|
120 |
|
|
|
652 |
|
|
|
108 |
|
General
Corporate
|
|
|
692 |
|
|
|
84,765 |
|
|
|
3,165 |
|
|
|
$ |
3,913 |
|
|
$ |
85,417 |
|
|
$ |
3,273 |
|
The
Company incurred facilities relocation and corporate restructuring charges in
conjunction with the Wendy’s Merger in 2008. The charges related primarily to
severance costs. We expect to incur additional facilities relocation and
corporate restructuring charges with respect to the Wendy’s Merger of $6,436 in
2009 and 2010.
The
facilities relocation charges incurred and recognized in our Arby’s restaurant
segment for 2008, 2007 and 2006 represent additional costs principally
related to the Company combining its existing restaurant operations with
those of RTM following the RTM Acquisition in 2005 including relocating the
corporate office of its restaurant group from Fort Lauderdale, Florida to new
offices in Atlanta, Georgia. RTM and AFA concurrently relocated from their
former facilities in Atlanta to the new offices in Atlanta. The charges
consisted of severance and employee retention incentives, employer relocation
costs, lease termination costs, office relocation expenses, and
changes in the estimated carrying costs for real estate we purchased under terms
of employee relocation agreements entered into as part of the RTM
Acquisition. The project to combine the RTM and Arby’s operations is completed;
as such, we do not expect to incur additional facilities relocation charges with
respect to the RTM Acquisition.
The general corporate
charges for 2008 and 2007 principally relate to
the transfer of substantially all of our senior executive responsibilities to
the ARG
executive
team (the “Corporate Restructuring”). In April 2007, the Company
announced that it would be closing its New York headquarters and
combining the corporate and restaurant operations in Atlanta, Georgia and completed
this transfer
of responsibilities in early 2008. Accordingly, to facilitate
this transition, the Company had entered into contractual settlements (the
“Contractual Settlements”) with the Former Executives evidencing the termination
of their employment agreements and providing for their resignation as executive
officers as of June 29, 2007 (the “Separation Date”). Under the terms
of the Contractual Settlements, the Chairman and former Chief Executive Officer
agreed to a payment obligation consisting of cash and investments with a fair
value of $50,289 as of July 1, 2007 and the Vice Chairman and former
President and Chief Operating Officer agreed to a payment obligation (both
payment obligations collectively, the “Payment Obligations”) consisting of cash
and investments with a fair value of $25,144 as of July 1, 2007, both
subject to applicable withholding taxes. The Company funded the
Payment Obligations to the Former Executives, net of applicable withholding
taxes, by the transfer of cash and investments to deferred compensation trusts
(the “2007 Trusts”) held by the Company as of their separation date (see Note 27
). The fair values of the 2007 Trusts at their distribution on December 30,
2007 were $47,429 for the Chairman and former Chief Executive Officer and
$23,705 for the Vice Chairman and former President and Chief Operating
Officer. As the Company did not fund the applicable withholding taxes on
the Contractual Settlements until December 30, 2007 in an accommodation that
provided us with additional operating liquidity through the end of 2007, the
Chairman and former Chief Executive Officer and Vice Chairman and former
President and Chief Operating Officer were paid additional amounts of $1,097 and
$548, respectively, in connection with the Contractual Settlements, net of
applicable withholding taxes, on December 30, 2007. The general corporate charge
of $84,765 for the year ended December 30, 2007 includes (1) the fair value of
the Payment Obligations paid to the Former Executives, excluding the portion of
the Payment Obligations representing their 2007 bonus amounts of $2,349 and
$1,150, respectively, which are included in “General and administrative” but
including related payroll taxes and the additional amounts, (2) severance of
$12,911 for two other former executives, excluding incentive compensation that
is due to one of them for his 2007 period of employment with the Company, both
including applicable employer payroll taxes, (3) severance and consulting fees
of $1,739 with respect to other New York headquarters’ executives and employees
and (4) a loss of $835 on properties and other assets at the Company’s former
New York headquarters, principally reflecting assets for which the appraised
value was less than book value, sold during 2007 to the Management Company (see
Note 27), all as part of the Corporate Restructuring. The Corporate
Restructuring
is completed
and, as such,
we do not expect to incur any additional charges with
respect thereto. The
general corporate charges of $3,165 for 2006 related to the Company’s decision
prior to 2006 not to relocate Triarc’s corporate offices from New York City to
Rye Brook, New York. During 2006, the Company decided to terminate
the Rye Brook lease rather than continue its efforts to sublease the facility
and incurred this charge principally representing a lease termination
fee.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
The
components of facilities relocation and corporate restructuring charges in 2008,
2007 and 2006 and an analysis of related activity in the facilities relocation
and corporate restructuring accrual are as follows:
|
|
2008
|
|
|
|
Balance
December 30, 2007
|
|
|
Provisions
|
|
|
Payments
|
|
|
Balance
December 28, 2008
|
|
|
Total
Expected to be Incurred
|
|
|
Total
Incurred to Date
|
|
Wendy’s Restaurants Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
costs
|
|
$ |
- |
|
|
$ |
3,101 |
|
|
$ |
- |
|
|
$ |
3,101 |
|
|
$ |
9,537 |
|
|
$ |
3,101 |
|
Total
Wendy’s restaurants segment
|
|
|
- |
|
|
|
3,101 |
|
|
|
- |
|
|
|
3,101 |
|
|
|
9,537 |
|
|
|
3,101 |
|
Arby’s
Restaurants Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
relocation costs
|
|
|
591 |
|
|
|
120 |
|
|
|
(639 |
) |
|
|
72 |
|
|
|
4,651 |
|
|
|
4,651 |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,471 |
|
|
|
7,471 |
|
|
|
|
591 |
|
|
|
120 |
(a) |
|
|
(639 |
) |
|
|
72 |
|
|
|
12,122 |
|
|
|
12,122 |
|
Non-cash
charges
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
719 |
|
|
|
719 |
|
Total
Arby’s restaurants segment
|
|
|
591 |
|
|
|
120 |
|
|
|
(639 |
) |
|
|
72 |
|
|
|
12,841 |
|
|
|
12,841 |
|
General
Corporate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and retention incentive compensation
|
|
|
12,208 |
|
|
|
692 |
|
|
|
(11,938 |
) |
|
|
962 |
|
|
|
84,622 |
|
|
|
84,622 |
|
Non-cash
charges
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
835 |
|
|
|
835 |
|
Total
general corporate
|
|
|
12,208 |
|
|
|
692 |
|
|
|
(11,938 |
) |
|
|
962 |
|
|
|
85,457 |
|
|
|
85,457 |
|
|
|
$ |
12,799 |
|
|
$ |
3,913 |
|
|
$ |
(12,577 |
) |
|
$ |
4,135 |
|
|
$ |
107,835 |
|
|
$ |
101,399 |
|
|
|
2007
|
|
|
|
Balance
December 31, 2006
|
|
|
Provisions
|
|
|
Payments
|
|
|
Write-off
of Assets
|
|
|
Balance
December 30, 2007
|
|
Arby’s
Restaurant Segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and retention incentive compensation
|
|
$ |
340 |
|
|
$ |
15 |
|
|
$ |
(355 |
) |
|
$ |
- |
|
|
$ |
- |
|
Employee
relocation costs
|
|
|
134 |
|
|
|
637 |
|
|
|
(180 |
) |
|
|
- |
|
|
|
591 |
|
Office
relocation costs
|
|
|
45 |
|
|
|
- |
|
|
|
(45 |
) |
|
|
- |
|
|
|
- |
|
Lease
termination costs
|
|
|
302 |
|
|
|
- |
|
|
|
(302 |
) |
|
|
- |
|
|
|
- |
|
Total
Arby’s restaurants segment
|
|
|
821 |
|
|
|
652 |
(a) |
|
|
(882 |
) |
|
|
- |
|
|
|
591 |
|
General
Corporate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and retention incentive compensation
|
|
|
- |
|
|
|
83,930 |
|
|
|
(71,722 |
) |
|
|
- |
|
|
|
12,208 |
|
Non-cash
charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on properties and other assets
|
|
|
- |
|
|
|
835 |
|
|
|
- |
|
|
|
(835 |
) |
|
|
- |
|
Total
general corporate
|
|
|
- |
|
|
|
84,765 |
|
|
|
(71,722 |
) |
|
|
(835 |
) |
|
|
12,208 |
|
|
|
$ |
821 |
|
|
$ |
85,417 |
|
|
$ |
(72,604 |
) |
|
$ |
(835 |
) |
|
$ |
12,799 |
|
|
|
2006
|
|
|
|
Balance
January 1, 2006
|
|
|
Provisions
(Reductions)
|
|
|
Payments
|
|
|
Balance
December 31, 2006
|
|
Arby’s
Restaurant Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and retention
incentive
compensation
|
|
$ |
3,812 |
|
|
$ |
640 |
|
|
$ |
(4,112 |
) |
|
$ |
340 |
|
Employee
relocation costs
|
|
|
1,544 |
|
|
|
(486 |
) |
|
|
(924 |
) |
|
|
134 |
|
Office
relocation costs
|
|
|
260 |
|
|
|
(91 |
) |
|
|
(124 |
) |
|
|
45 |
|
Lease
termination costs
|
|
|
774 |
|
|
|
45 |
|
|
|
(517 |
) |
|
|
302 |
|
Total
Arby’s restaurant segment
|
|
|
6,390 |
|
|
|
108 |
(a) |
|
|
(5,677 |
) |
|
|
821 |
|
General
Corporate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
termination costs
|
|
|
1,535 |
|
|
|
3,165 |
|
|
|
(4,700 |
) |
|
|
- |
|
|
|
$ |
7,925 |
|
|
$ |
3,273 |
|
|
$ |
(10,377 |
) |
|
$ |
821 |
|
_____________________________
|
(a)
Reflects change in estimate of total cost to be
incurred.
|
The following is a
summary of our impairment of other long-lived assets losses by business
segment:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Arby’s
Restaurants business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
of Company-owned restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties
|
|
$ |
6,906 |
|
|
$ |
1,717 |
|
|
$ |
2,433 |
|
Favorable
leases
|
|
|
521 |
|
|
|
- |
|
|
|
1,034 |
|
Franchise
agreements
|
|
|
510 |
|
|
|
84 |
|
|
|
146 |
|
T.J.
Cinnamons brand & other
|
|
|
65 |
|
|
|
822 |
|
|
|
416 |
|
|
|
|
8,002 |
|
|
|
2,623 |
|
|
|
4,029 |
|
Wendy’s
Restaurants business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
of surplus properties:
|
|
|
1,578 |
|
|
|
- |
|
|
|
- |
|
Asset
management segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
of internally developed financial model
|
|
|
- |
|
|
|
3,024 |
|
|
|
- |
|
Impairment
of asset management contracts
|
|
|
- |
|
|
|
1,113 |
|
|
|
1,525 |
|
Impairment
of non-compete agreements
|
|
|
- |
|
|
|
285 |
|
|
|
- |
|
|
|
|
- |
|
|
|
4,422 |
|
|
|
1,525 |
|
General
corporate-aircraft
|
|
|
9,623 |
|
|
|
- |
|
|
|
- |
|
Total
impairment of long-lived assets
|
|
$ |
19,203 |
|
|
$ |
7,045 |
|
|
$ |
5,554 |
|
The
Arby’s Company-owned restaurants impairment losses in each year predominantly
reflected (1) impairment charges on all restaurant level assets resulting from
the deterioration in operating performance of certain restaurants and (2)
additional charges for capital improvements in restaurants impaired in a prior
year which did not subsequently recover.
The T.J.
Cinnamons brand impairment losses resulted from the Company’s assessment of the
brand which offers, through franchised and Company-owned restaurants, a product
line of gourmet cinnamon rolls, coffee rolls, coffees and other related
products. These impairment assessments resulted from (1) the
corresponding reduction in anticipated T.J. Cinnamons unit growth and (2) lower
than expected revenues and an overall decrease in management’s focus on the T.J.
Cinnamons brand prior to 2006.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
The
Wendy’s Company-owned restaurants impairment losses reflect write-downs in the
carrying value of surplus properties and properties held for sale.
The
charges related to the impairment of the asset management contracts reflected
the write-off of their value resulting from early termination of CDOs and the
related reduction of the Company’s asset management fees to be received and, in
2007 a CDO which no longer had any projected cash flows. In addition to
the impairment of asset management contracts, the 2007 charge is also related to
(1) anticipated losses on the sale of an internally developed financial model
(see Note 27) and (2) impairment losses related to the early termination of
non-compete agreements in connection with the Deerfield Sale.
We are in
the process of disposing of one of our Company-owned aircraft. As a
result, we have classified this asset as held-for-sale included in “Properties”
on the accompanying consolidated balance sheet at December 28, 2008 and recorded
a general corporate impairment charge to reflect its fair value as a result of
an appraisal related to the potential sale.
All of
these impairment losses represented the excess of the carrying value over the
fair value of the affected assets and are included in “Impairment of other
long-lived assets” in the accompanying Consolidated Statements of
Operations. The fair values of impaired assets discussed above for the
Arby’s restaurants segment and the asset management segment were estimated
to be the present values of the anticipated cash flows associated with each
related Company-owned asset. The fair values of the impaired assets
discussed above for the Wendy’s restaurants segment were estimated to be their
expected realizable value, which reflect market declines in the areas where the
properties are located.
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Interest
income
|
|
$ |
1,285 |
|
|
$ |
9,100 |
|
|
$ |
72,552 |
|
Distributions,
including dividends
|
|
|
2,818 |
|
|
|
1,784 |
|
|
|
1,487 |
|
Realized
(losses) gains on available-for-sale securities
|
|
|
(1,587 |
) |
|
|
21,009 |
|
|
|
7,263 |
|
Realized
gains on sales of investment limited partnerships, similar investment
entities and other Cost Investments
|
|
|
1,637 |
|
|
|
26,712 |
|
|
|
3,559 |
|
Realized
gains on securities sold and subsequently purchased
|
|
|
5,789 |
|
|
|
- |
|
|
|
2,334 |
|
Realized
gains on a derivative other than trading
|
|
|
2,621 |
|
|
|
3,017 |
|
|
|
1,665 |
|
Realized
losses on trading securities and trading derivatives
|
|
|
- |
|
|
|
(909 |
) |
|
|
(11,995 |
) |
Unrealized
gains on trading securities and trading derivatives
|
|
|
- |
|
|
|
172 |
|
|
|
5,332 |
|
Unrealized
gains on securities sold with an obligation to purchase
|
|
|
3,211 |
|
|
|
- |
|
|
|
3,719 |
|
Unrealized
gains (losses) on derivatives other than trading
|
|
|
(4,339 |
) |
|
|
1,406 |
|
|
|
(1,317 |
) |
Investment
fees
|
|
|
(1,997 |
) |
|
|
(181 |
) |
|
|
(677 |
) |
Equity
in earnings of an investment limited partnership
|
|
|
- |
|
|
|
- |
|
|
|
396 |
|
|
|
$ |
9,438 |
|
|
$ |
62,110 |
|
|
$ |
84,318 |
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Other
than temporary losses on investments
|
|
$ |
(112,741 |
) |
|
$ |
(9,909 |
) |
|
$ |
(4,120 |
) |
The Other
than temporary losses on investments in 2008 of $112,741 related to (1)
$68,086 from our investments in common stock of DFR (see Notes 3 and 8), (2) an
allowance for doubtful accounts of $21,227 related to our DFR
Notes (see Note 4), (3) $13,109 of charges attributable to the
decline in fair value of the Company’s available-for-sale securities primarily
held in the Equities Account due to continued weakness in the financial markets
(see Note 8), (4) a charge of $8,504 attributable to the decline in
value of the Company’s investment at cost in Jurlique (see Note 8), and (5) a
charge of $1,815 attributable to the decline in fair value of one of our cost
investments (see Note 8).
The Other
than temporary losses in 2007 of $9,909 related primarily to the recognition of
(1) $8,693 of charges related to certain CDO preferred stock investments
resulting from a decrease in the projected cash flows of the underlying CDOs and
(2) $1,101 from a significant decline in the market value of one of the
Company’s available-for-sale investments.
The Other
than temporary losses in 2006 of $4,120 related primarily to (1) a $2,142 charge
related to a significant decline in the market value of one of the investments
in two deferred compensation trusts (see Note 27) and (2) $1,267 of charges
related to certain CDO preferred stock investments resulting from a decrease in
the projected cash flows of the underlying CDOs.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Rent
expense of properties subleased to third parties, net
|
|
$ |
3,114 |
|
|
$ |
- |
|
|
$ |
- |
|
Equity
in net earnings of joint venture with THI
|
|
|
(1,974 |
) |
|
|
- |
|
|
|
- |
|
Other,
net
|
|
|
(487 |
) |
|
|
263 |
|
|
|
887 |
|
|
|
$ |
653 |
|
|
$ |
263 |
|
|
$ |
887 |
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Interest
income
|
|
$ |
4,990 |
|
|
$ |
725 |
|
|
$ |
969 |
|
Amortization
of fair value of debt guarantees (Note 26)
|
|
|
79 |
|
|
|
618 |
|
|
|
192 |
|
Costs
of a financing alternative not consummated
|
|
|
(5,131 |
) |
|
|
- |
|
|
|
- |
|
Equity
in net earnings (losses) of investees (Note 8)
|
|
|
(732 |
) |
|
|
(2,096 |
) |
|
|
2,725 |
|
Gain
(loss) on foreign currency put and call arrangement (Note
12)
|
|
|
- |
|
|
|
(877 |
) |
|
|
(420 |
) |
Costs
related to a strategic business alternative not
consummated
|
|
|
- |
|
|
|
(369 |
) |
|
|
(2,135 |
) |
Loss
on investment in DFR of shares distributed from the 2007 Trusts (Note 8
and 27)
|
|
|
- |
|
|
|
(2,872 |
) |
|
|
- |
|
Gain
from sales of investment in Encore (Note 8)
|
|
|
- |
|
|
|
2,558 |
|
|
|
2,259 |
|
Gain
on sale of a portion of the investment in Jurlique (Note
8)
|
|
|
- |
|
|
|
- |
|
|
|
1,722 |
|
Other
income
|
|
|
197 |
|
|
|
1,258 |
|
|
|
3,412 |
|
Other
expense
|
|
|
(9 |
) |
|
|
(301 |
) |
|
|
(47 |
) |
|
|
$ |
(606 |
) |
|
$ |
(1,356 |
) |
|
$ |
8,677 |
|
Prior to
2006, we sold the stock of the companies comprising our former
premium beverage and soft drink concentrate business segments (collectively, the
“Beverage Discontinued Operations”) and the stock or the principal assets of the
companies comprising SEPSCO’s former utility and municipal services and
refrigeration business segments (the “SEPSCO Discontinued Operations”). During
2006, we closed two Arby’s restaurants which were a component of the Arby’s
restaurants segment (the “Arby’s Restaurant Discontinued
Operations”).
The
Company has accounted for all of these operations as discontinued
operations.
The
income (loss) from discontinued operations consisted of the
following:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Sales
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
725 |
|
Loss
from operations before benefit from income taxes
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
( 662 |
) |
Benefit
from income taxes
|
|
|
- |
|
|
|
- |
|
|
|
250 |
|
|
|
|
- |
|
|
|
- |
|
|
|
(412 |
) |
Gain
(loss) on disposal of businesses before benefit from income
taxes
|
|
|
242 |
|
|
|
(247 |
) |
|
|
(721 |
) |
Benefit
from income taxes (see Note 14)
|
|
|
1,975 |
|
|
|
1,242 |
|
|
|
1,004 |
|
|
|
|
2,217 |
|
|
|
995 |
|
|
|
283 |
|
Income
(loss) from discontinued operations
|
|
$ |
2,217 |
|
|
$ |
995 |
|
|
$ |
(129 |
) |
Current
liabilities relating to discontinued operations as of December 28, 2008 and
December 30, 2007 consisted of the following:
|
|
Year-End
|
|
|
|
2008
|
|
|
2007
|
|
Accrued
expenses, including accrued income taxes, of the Beverage Discontinued
Operations (see Note 14)
|
|
$ |
3,805 |
|
|
$ |
6,639 |
|
Liabilities
relating to the SEPSCO Discontinued Operations
|
|
|
362 |
|
|
|
573 |
|
Liabilities
relating to the Arby’s Restaurant Discontinued Operations
|
|
|
83 |
|
|
|
67 |
|
|
|
$ |
4,250 |
|
|
$ |
7,279 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
We expect
that the liquidation of the remaining liabilities associated with our
discontinued operations as of December 28, 2008 will not have a material adverse
impact on our consolidated financial position or results of
operations. To the extent any estimated amounts included in the
current liabilities relating to the discontinued operations are determined to be
in excess of the requirement to liquidate the associated liability, any such
excess will be released at that time as a component of gain or loss on disposal
of discontinued operations.
401(k)
Plans
Subject
to certain restrictions, the Company has 401(k) defined contribution plans (the
“401(k) Plans”) for all of its employees who meet certain minimum requirements
and elect to participate. Under the provisions of the 401(k) Plans, employees
may contribute various percentages of their compensation ranging up to a maximum
of 20%, 50%, 75% or 100%, depending on the respective plan, subject to
certain limitations. The 401(k) Plans provide for Company matching
contributions of employee contributions up to 6% depending on the respective
plan. Some of these 401(k) Plans also permit or require profit
sharing contributions.
In
connection with the matching and profit sharing contributions, the Company
provided $4,829, $600 and $874 as compensation expense in 2008, 2007 and 2006,
respectively.
Pension
Plans
The
Company has two domestic defined benefit plans which were assumed in connection
with the Wendy’s Merger. The account balance defined benefit pension plan (the
“ABP Plan”) and the Crew defined benefit plan (the “Crew Plan”, together
referred to as the “Wendy’s Plans”), covered all eligible employees of
Wendy’s.
The
benefits under the Wendy’s Plans were frozen prior to the Wendy’s Merger.
Wendy’s received approval for the termination of the Wendy’s Plans by the
Pension Benefit Guaranty Corporation and the Internal Revenue Service by the
fourth quarter of 2008. In accordance with the terms of the Merger,
Wendy’s obtained an updated actuarial valuation of the unfunded pension
liability as of September 28, 2008. We made lump sum distributions and purchased
annuities for the approved termination of the Wendy’s Plans in the fourth
quarter of 2008 and paid $304 for certain plan settlements in the first quarter
of 2009.
The
Company maintains two other defined benefit plans, the benefits under which were
frozen in 1992 and for which the Company has no unrecognized prior service
cost. The measurement date used by the Company in determining amounts
related to its defined benefit plans is its current fiscal year end based on the
rollforward of an actuarial report.
A
reconciliation of the beginning and ending balances of the accumulated benefit
obligations and the fair value of these two plans’ assets and a reconciliation
of the resulting funded status of the plans to the net amount recognized
are:
|
|
2008
|
|
|
2007
|
|
Change
in accumulated benefit obligations:
|
|
|
|
|
|
|
|
|
Accumulated
benefit obligations at beginning of year
|
|
$ |
3,949 |
|
|
$ |
4,382 |
|
Service
cost (consisting entirely of plan administrative expenses)
|
|
|
95 |
|
|
|
90 |
|
Interest
cost
|
|
|
222 |
|
|
|
220 |
|
Actuarial
gain
|
|
|
(91 |
) |
|
|
(325 |
) |
Benefit
payments
|
|
|
(338 |
) |
|
|
(300 |
) |
Plan
administrative and investment expense payments
|
|
|
(106 |
) |
|
|
(118 |
) |
Accumulated
benefit obligations at end of year
|
|
|
3,731 |
|
|
|
3,949 |
|
Change
in fair value of the plans’ assets:
|
|
|
|
|
|
|
|
|
Fair
value of the plans’ net assets at beginning of year
|
|
|
3,574 |
|
|
|
3,722 |
|
Actual
return on the plans’ assets
|
|
|
(726 |
) |
|
|
134 |
|
Company
contributions
|
|
|
46 |
|
|
|
136 |
|
Benefit
payments
|
|
|
(338 |
) |
|
|
(300 |
) |
Plan
administrative and investment expense payments
|
|
|
(106 |
) |
|
|
(118 |
) |
Fair
value of the plans’ net assets at end of year
|
|
|
2,450 |
|
|
|
3,574 |
|
Unfunded
status at end of year
|
|
|
(1,281 |
) |
|
|
(375 |
) |
Unrecognized
net actuarial and investment loss
|
|
|
1,662 |
|
|
|
831 |
|
Net
amount recognized
|
|
$ |
381 |
|
|
$ |
456 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
The net
amount recognized in the consolidated balance sheets consisted of the
following:
|
|
Year-End
|
|
|
|
2008
|
|
|
2007
|
|
Accrued
pension liability reported in “Other liabilities”
|
|
$ |
(1,281 |
) |
|
$ |
(375 |
) |
Unrecognized
pension loss reported in the “Accumulated other comprehensive income
(loss)” component of “Stockholders’ equity”
|
|
|
1,662 |
|
|
|
831 |
|
Net
amount recognized
|
|
$ |
381 |
|
|
$ |
456 |
|
Unrecognized
pension loss in the above table consists entirely of unrecognized net loss since
these defined benefit plans have no unrecognized prior service cost or net
transition asset or obligation. As of December 28, 2008 and December
30, 2007 each of the two plans have accumulated benefit obligations in excess of
the fair value of the assets of the respective plan.
The
components of the net periodic pension cost are as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Service
cost (consisting entirely of plan administrative expenses)
|
|
$ |
95 |
|
|
$ |
90 |
|
|
$ |
94 |
|
Interest
cost
|
|
|
222 |
|
|
|
220 |
|
|
|
217 |
|
Expected
return on the plans’ assets
|
|
|
(219 |
) |
|
|
(232 |
) |
|
|
(262 |
) |
Amortization
of unrecognized net loss
|
|
|
23 |
|
|
|
26 |
|
|
|
48 |
|
Net
periodic pension cost
|
|
$ |
121 |
|
|
$ |
104 |
|
|
$ |
97 |
|
The
amount included in accumulated other comprehensive income expected to be
recognized in net periodic pension cost for 2009 is $75, consisting entirely of
unrecognized net loss. The unrecognized pension loss in 2008,
recovery of unrecognized pension loss in 2007 and 2006, less related deferred
income taxes, have been reported as “Unrecognized pension loss” and “Recovery of
unrecognized pension loss,” respectively, as components of comprehensive income
(loss) reported in the accompanying consolidated statements of stockholders’
equity consisting of the following:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Unrecognized
pension (loss) recovery:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) gain arising during the year
|
|
$ |
(854 |
) |
|
$ |
227 |
|
|
$ |
468 |
|
Amortization
of unrecognized net loss to net periodic pension cost
|
|
|
23 |
|
|
|
26 |
|
|
|
48 |
|
|
|
|
(831 |
) |
|
|
253 |
|
|
|
516 |
|
Deferred
income tax benefit (provision)
|
|
|
311 |
|
|
|
(90 |
) |
|
|
(189 |
) |
|
|
$ |
(520 |
) |
|
$ |
163 |
|
|
$ |
327 |
|
The
actuarial assumptions used in measuring the net periodic pension cost and
accumulated benefit obligations are as follows:
|
2008
|
|
2007
|
|
2006
|
Net
periodic pension cost:
|
|
|
|
|
|
Expected
long-term rate of return on plan assets
|
6.5%
|
|
6.5%
|
|
7.5%
|
Discount
rate
|
6.0%
|
|
5.5%
|
|
5.0%
|
Benefit
obligations at end of year:
|
|
|
|
|
|
Discount
rate
|
6.3%
|
|
6.0%
|
|
5.5%
|
The
expected long-term rate of return on plan assets of 6.5% reflects the Company’s
estimate of the average returns on plan investments and after giving
consideration to the targeted asset allocation discussed below.
The
effect of the increase in the discount rate, used in determining the net
periodic pension cost, from 2007 to 2008 resulted in an immaterial decrease in
the net periodic pension cost. The effect of the increase in the
discount rate, used in determining the accumulated benefit obligation, from 2007
to 2008 resulted in a decrease in the accumulated benefit obligation of
$80. The effect of the decrease in the expected long-term rate of
return on plan assets, used in determining the net periodic pension cost, from
2006 to 2007 resulted in an increase in the net periodic pension cost of $36.
The effect of the increase in the discount rate used in determining the
accumulated benefit obligations, from 2006 to 2007 resulted in a decrease in the
accumulated benefit obligation of $188.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
The
weighted-average asset allocations of the two defined benefit plans for other
than Wendy’s employees by asset category at December 28, 2008 and December 30,
2007 are as follows:
|
Year-End
|
|
2008
|
|
2007
|
Debt
securities
|
65%
|
|
60%
|
Equity
securities
|
31%
|
|
38%
|
Cash
and cash equivalents
|
4%
|
|
2%
|
|
100%
|
|
100%
|
Since the
benefits under the Company’s defined benefit plans are frozen, the strategy for
the investment of plan assets is weighted towards capital
preservation. Accordingly, the target asset allocation is 60% of
assets in debt securities with intermediate maturities and 40% in large
capitalization equity securities.
The
Company currently expects to contribute an aggregate $375 to its two defined
benefit plans in 2009.
The
expected benefits to be paid by the Company’s remaining defined benefit plans
over the next five fiscal years and in the aggregate for the five fiscal years
thereafter are as follows:
Fiscal Year(s)
|
|
2009
|
$ 329
|
2010
|
333
|
2011
|
340
|
2012
|
341
|
2013
|
335
|
2014-2018
|
1,577
|
The
Company leases real property, leasehold interests, and restaurant,
transportation, and office equipment. Some leases which relate to
restaurant operations provide for contingent rentals based on sales
volume. Certain leases also provide for payments of other costs such
as real estate taxes, insurance and common area maintenance which are not
included in rental expense or the future minimum rental payments set forth
below. The Company assumed numerous leases in connection with the
Wendy’s Merger consisting of the Capitalized Lease Obligations
and operating leases.
Rental
expense under operating leases, which include Wendy’s since the Wendy’s
Merger, consists of the following components:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Minimum
rentals
|
|
$ |
94,547 |
|
|
$ |
79,484 |
|
|
$ |
77,360 |
|
Contingent
rentals
|
|
|
4,989 |
|
|
|
2,711 |
|
|
|
3,172 |
|
|
|
|
99,536 |
|
|
|
82,195 |
|
|
|
80,532 |
|
Less
sublease income
|
|
|
4,771 |
|
|
|
9,131 |
|
|
|
8,957 |
|
|
|
$ |
94,765 |
|
|
$ |
73,064 |
|
|
$ |
71,575 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
The
Company’s future minimum rental payments and sublease rental receipts, for
noncancelable leases having an initial lease term in excess of one year as of
December 28, 2008, are as follows:
|
|
|
Rental
Payments
|
|
|
Sublease
Rental Receipts
|
|
|
|
|
Sale-Leaseback
Obligations
|
|
|
Capitalized
Leases
|
|
|
Operating
Leases (a)
|
|
|
Sale-Leaseback
Obligations
|
|
|
Capitalized
Leases
|
|
|
Operating
Leases (a)
|
|
Fiscal Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
$ |
14,250 |
|
|
$ |
29,147 |
|
|
$ |
159,464 |
|
|
$ |
996 |
|
|
$ |
485 |
|
|
$ |
16,859 |
|
2010
|
|
|
|
12,850 |
|
|
|
15,437 |
|
|
|
144,576 |
|
|
|
996 |
|
|
|
475 |
|
|
|
15,696 |
|
2011
|
|
|
|
14,207 |
|
|
|
17,813 |
|
|
|
134,831 |
|
|
|
996 |
|
|
|
475 |
|
|
|
14,499 |
|
2012
|
|
|
|
16,372 |
|
|
|
11,728 |
|
|
|
120,869 |
|
|
|
996 |
|
|
|
475 |
|
|
|
11,983 |
|
2013
|
|
|
|
14,511 |
|
|
|
11,156 |
|
|
|
115,002 |
|
|
|
975 |
|
|
|
475 |
|
|
|
9,847 |
|
Thereafter
|
|
|
|
157,863 |
|
|
|
111,860 |
|
|
|
1,181,553 |
|
|
|
4,889 |
|
|
|
2,700 |
|
|
|
67,724 |
|
Total
minimum payments
|
|
|
|
230,053 |
|
|
|
197,141 |
|
|
|
1,856,295 |
|
|
|
9,848 |
|
|
|
5,085 |
|
|
|
136,608 |
|
Less
amounts representing interest, with interest rates of between 3% and
22%
|
|
|
|
106,224 |
|
|
|
90,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present
value of minimum sale-leaseback and capitalized lease
payments
|
|
|
$ |
123,829 |
|
|
$ |
106,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes
the rental payments under the lease for the Company’s former corporate
headquarters and of the sublease for office space on two of the floors
covered under the lease to the Management Company (see Note
27). Under terms of the sublease, the Company receives
approximately $153 per month which includes an amount equal to the rent
the Company pays plus a fixed amount reflecting a portion of the increase
in the fair market value, at the time the sublease was executed, of the
Company’s leasehold interest as well as amounts for property taxes and the
other costs related to the use of the floor. Either may
terminate the sublease upon sixty days
notice.
|
As of
December 28, 2008, the Company had $138,231 of “Favorable leases,” net of
accumulated amortization, included in “Other intangible assets” (see Note 9) and
$96,407 of unfavorable leases included in “Other liabilities,” or $41,824 of net
favorable leases. The future minimum rental payments set forth above
reflect the rent expense to be recognized over the lease terms and, accordingly,
have been increased by (1) the $41,824 of net favorable leases, and (2) $893
which represents amounts advanced by landlords for improvements of leased
facilities and reimbursed through future rent payments, less payments to lessees
for the right to assume leases which have below market rent, net of (1) $21,833
of Straight-Line Rent, and (2) $3,017 of other related
items. Estimated sublease future rental receipts exclude sublessor
rental obligations for closed locations. All amounts include the effects of
leases assumed in the Wendy’s Merger.
The
Company leases properties it owns to third parties. Properties leased to third
parties under operating leases as of December 28, 2008 and December 30, 2007
include:
|
|
2008
|
|
|
2007
|
|
Land
|
|
$ |
21,434 |
|
|
$ |
4,446 |
|
Buildings
and improvements
|
|
|
68,663 |
|
|
|
2,816 |
|
Office,
restaurant and transportation equipment
|
|
|
10,572 |
|
|
|
177 |
|
|
|
|
100,669 |
|
|
|
7,439 |
|
Accumulated
depreciation
|
|
|
47,232 |
|
|
|
635 |
|
|
|
$ |
53,437 |
|
|
$ |
6,804 |
|
The
present values of minimum sale-leaseback and capitalized lease payments are
included either with “Long-term debt” or “Current portion of long-term debt,” as
applicable, in the accompanying consolidated balance sheet as of December 28,
2008 (see Note 10).
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
Guarantees
and Contingent Liabilities
Our
wholly-owned subsidiary, National Propane, retains a less than 1% special
limited partner interest in our former propane business, now known as AmeriGas
Eagle Propane, L.P., (“AmeriGas Eagle”). National Propane agreed that
while it remains a special limited partner of AmeriGas Eagle, National Propane
would indemnify the owner of AmeriGas Eagle for any payments the owner makes
related to the owner’s obligations under certain of the debt of AmeriGas Eagle,
aggregating approximately $138,000 as of December 28, 2008, if Amerigas is
unable to repay or refinance such debt, but only after recourse by the owner to
the assets of AmeriGas Eagle. National Propane’s principal asset is
an intercompany note receivable from Wendy’s/Arby’s in the amount of $50,000 as
of December 28, 2008. We believe it is unlikely that we will be
called upon to make any payments under this indemnity. Prior to 2006,
AmeriGas Propane, L.P., (“AmeriGas Propane”), purchased all of the interests in
AmeriGas Eagle other than National Propane’s special limited partner
interest. Either National Propane or AmeriGas Propane may require
AmeriGas Eagle to repurchase the special limited partner
interest. However, we believe it is unlikely that either party would
require repurchase prior to 2009 as either AmeriGas Propane would owe us tax
indemnification payments if AmeriGas Propane required the repurchase or we would
accelerate payment of deferred taxes of $34,700 as of December 28, 2008,
associated with our sale of the propane business if National Propane required
the repurchase. As of December 28, 2008, we have net operating loss
tax carryforwards sufficient to substantially offset these deferred
taxes.
RTM, a
subsidiary of Wendy’s/Arby’s, guarantees the lease obligations of 10 RTM
restaurants formerly operated by affiliates of RTM as of December 28, 2008,
(“Affiliate Lease Guarantees”). The RTM selling stockholders have
indemnified us with respect to the guarantee of the remaining lease
obligations. In addition, RTM remains contingently liable for 15
leases for restaurants sold by RTM prior to our acquisition of RTM in 2005 (the
“RTM Acquisition”) if the respective purchasers do not make the required lease
payments (collectively with the Affiliate Lease Guarantees, the “Lease
Guarantees”). The Lease Guarantees, which extend through 2025,
including all existing extension or renewal option periods, could aggregate a
maximum of approximately $16,400 and $18,000 as of December 28, 2008 and
December 30, 2007, respectively, including approximately $13,000 and $14,000,
respectively, under the Affiliate Lease Guarantees, assuming all scheduled lease
payments have been made by the respective tenants through December 28, 2008 and
December 30, 2007, respectively. The estimated fair value of the
Lease Guarantees was $1,506 as of the date of the RTM Acquisition based on the
net present value of the probability adjusted payments which could have been
required to be made by the Company. Such amount was recorded as a
liability by the Company in connection with the RTM Acquisition purchase price
allocation. The liability is being amortized to “Other income
(expense), net” based on the decline in the net present value of those
probability adjusted payments in excess of any actual payments made over
time. There remains an unamortized carrying amount of $460 and $540
included in “Other liabilities (expense)” as of December 28, 2008, and December
30, 2007, respectively, with respect to the Lease Guarantees.
In
addition, Wendy’s has guaranteed certain leases and other obligations primarily
related to restaurant locations operated by its franchisees amounting to
$37,999. These leases extend through 2022, including all existing
extension or renewal option periods. We have not received any notice
of default related to these leases as of December 28, 2008. In the
event of default by a franchise owner, Wendy’s generally retains the right to
acquire possession of the related restaurant locations. Wendy’s is
contingently liable for certain other leases which have been assigned to
unrelated third parties, who have indemnified Wendy’s against future liabilities
arising under the leases amounting to $107,459. These leases expire on various
dates, which extend through 2022, including all existing extension or renewal
option periods.
Wendy’s is
self-insured for most domestic workers’ compensation, general liability and
automotive liability losses subject to per occurrence and aggregate annual
liability limitations, and determines its liability for claims incurred but not
reported for these liabilities on an actuarial basis. Arby’s purchases insurance
for most domestic workers’ compensation, general liability and automotive
liability losses subject to per occurrence and aggregate annual liability
limitations, and also determines its liability for claims incurred but not
reported for these liabilities on an actuarial basis. Wendy’s and
Arby’s are self-insured for health care claims for eligible participating
employees subject to certain deductibles and limitations, and determines its
liability for health care claims incurred but not reported based on historical
claims runoff data.
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. In accordance with FIN 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others”, 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. Wendy’s potential
recourse for the aggregate amount of these loans amounted to $19,059 as of
December 28, 2008. During 2008, Wendy’s recourse obligation
associated with defaulted loans was not considered material, and Wendy’s did not
enter into any new loan guarantees during 2008 (See Note
13).
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
Wendy’s
and Arby’s have outstanding letters of credit of $18,573 and $7,799,
respectively, with various parties at December 28, 2008; however, management
does not expect any material loss to result from these letters of credit because
we do not believe performance will be required.
Purchase
and Capital Commitments
Wendy’s/Arby’s
Beverage Agreements
Wendy’s and
Arby’s have entered into beverage agreements, with the Coca-Cola Company and
PepsiCo, Inc., respectively to provide fountain beverage products and certain
marketing support funding to the Company and its franchisees. These
agreements require minimum purchases of fountain beverage syrup (“Syrup”), by
the Company and its franchisees at certain preferred prices until the total
contractual gallon volume usage has been reached. In connection with
these contracts, the Company and its franchise associations (on behalf of the
Company’s franchisees) received certain upfront fees at the inception of the
contract which are being amortized based on Syrup usage over the contract
term. In addition, these agreements provide various annual fees paid
to us, based on the vendor’s expectation of annual Company Syrup usage, which
are amortized over annual usage as a reduction of “Cost of Sales” costs in our
Consolidated Statements of Operations. Any unamortized amounts are
included in “Deferred income”, and usage that exceeds estimated amounts are
included in “Accounts receivable”, both in the accompanying Consolidated Balance
Sheets.
Beverage
purchases made by the Company under these various agreements during 2008 and
2007 were approximately $13,908 and $7,524, respectively. Future
purchases by the Company under these beverage commitments are estimated to be
approximately $33,781 per year over the next five years. Based on current
preferred prices and the current ratio of sales at Company-owned restaurants to
franchised restaurants, the total remaining Company beverage commitment is
approximately $266,329 over the remaining life of the contracts. As
of December 28, 2008, $3,542 is due from beverage vendors and included in
“Accounts receivable” for the excess Syrup usage in 2008 over originally
estimated annual amounts, and $16,086 included in “Deferred income” relating to
the unamortized upfront fees received at the inception of these beverage
contracts.
Wendy’s
Food Purchase Commitments
Wendy’s
has entered into various long-term contractual agreements with a number of its
food suppliers. The range of prices and volume of purchases under the
agreements may vary according to the Company’s demand for the products and
fluctuations in market rates. These agreements help the Company
secure pricing and product availability. A majority of these
contracts provide for termination of the contract upon 90 day notice, and
therefore, the Company does not believe that termination of these agreements,
which aggregate approximately $139,075 would have a significant impact on the
Company’s financial positions or results of operations.
Advertising
Commitments
Wendy’s
and Arby’s have purchase commitments of approximately $113,674 and $20,464
related to execution of our advertising strategy, including agency fees and
media buy obligations for 2009. Because most media purchase
commitments can be canceled within 90 days of scheduled broadcast, the Company
does not believe that termination of these agreements would have a significant
impact on the Company’s operations.
Capital
Expenditures Commitments
As of
December 28, 2008, the Company has $18,591 of outstanding commitments for
capital expenditures, of which $12,841 is expected to be paid in
2009.
Deferred
compensation trusts
Prior to
2006 the Company provided aggregate incentive compensation of $22,500 to the
Former Executives which had been invested in two deferred compensation trusts
(the “Deferred Compensation Trusts”) for their benefit. As of January
1, 2007, the obligation to the Former Executives related to the Deferred
Compensation Trusts was $35,679. This obligation was settled effective July 1,
2007 as a result of the Former Executives’ resignation and the assets in the
Deferred Compensation Trusts were either distributed to the Former Executives or
used to satisfy withholding taxes. In addition, the Former Executives
paid $801 to the Company during 2007 which represented the balance of
withholding taxes payable on their behalf. As of the settlement date, the
obligation was $38,195 which represented the then fair value of the assets held
in the Deferred Compensation Trusts. Deferred compensation expense of
$2,516 and $1,720 was recognized in 2007 through the settlement date and 2006,
respectively, for net increases in the fair value of the investments in the
Deferred Compensation Trusts. Under GAAP, the Company was unable
to
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
recognize
any investment income for unrealized net increases in the fair value of those
investments in the Deferred Compensation Trusts that were accounted for under
the Cost Method. The Company did recognize net investment income
(loss) from investments in the Deferred Compensation Trusts of $8,653 and
($1,002) in 2007 through the settlement date and 2006,
respectively. The net investment income during 2007 consisted of
$8,449 of realized gains almost entirely attributable to the transfer of the
investments to the Former Executives and $222 of interest income, less
management fees of $18. The net investment loss during 2006 consisted of an
impairment charge of $2,142 related to an investment fund within the Deferred
Compensation Trusts which experienced a significant decline in market value
which the Company deemed to be other than temporary and management fees of $36,
less realized gains from the sale of certain Cost Method investments of $586,
which included increases in value prior to 2006 of $395, equity in earnings of
an Equity Method investment purchased and sold during 2006 of $396 and interest
income of $194. Realized gains, interest income and investment
management fees are included in “Investment income, net” and deferred
compensation expense is included in “General and administrative” expenses in the
accompanying Consolidated Statements of Operations.
In
October 2007, there was a settlement of a lawsuit related to an investment that
had been included in the Deferred Compensation Trusts. The terms of
the Contractual Settlements included provisions pursuant to which the Former
Executives would be responsible for any settlement amounts under this
lawsuit. As a result, the Former Executives were responsible for the
approximate $1,500 settlement cost. The Company reduced its deferred
compensation expense included in “General and administrative, to reflect the
responsibility of the Former Executives for the settlement, and its “Investment
income, net” in the accompanying Consolidated Statements of Operations for 2007
to reflect the cost of the settlements. The Company received the
reimbursements from the Former Executives, net of the tax withheld during 2007
and an adjustment of the settlement amount in 2008, paid the settlement amount
during 2007 and received a refund for the applicable taxes withheld with the
respective payroll tax return filings in 2008.
Distributions
to co-investment shareholders
As part
of its overall retention efforts, the Company provided certain of its Former
Executives and current and former employees, the opportunity to co-invest with
the Company in certain investments and prior to 2006 made related loans to
management. As of December 31, 2006, all of these loans have been settled and
the Company no longer makes any such loans. The Company and certain
of its former management have one remaining co-investment, 280 BT, which is a
limited liability holding company principally owned by the Company and former
company management that, among other things, invested in operating
companies. During 2008, the Company received distributions of $2,014
from the liquidation of certain of the investments owned by 280 BT. The minority
portions of these distributions of $402 were further distributed to 280 BT’s
minority shareholders.
Information
pertaining to the remaining co-investment is as follows:
|
|
280
BT
|
Ownership
percentages at December 28, 2008:
|
|
|
Company
|
|
80.1%
(a)
|
Former
officers of the Company
|
|
11.2%
|
Other
|
|
8.7%
|
(a)
|
Includes
the effect of the surrender by former Company officers of portions of
their respective co-investment interests in 280 BT to the Company in
settlement of non-recourse notes of $723 in 2006, which increased the
Company’s ownership percentage to 80.1% at December 31, 2006. Such
settlements in 2006 resulted in reductions of the minority interests in
280 BT of $300 as a result of the Company now owning the surrendered
interests.
|
In
addition to 280 BT, the Company and certain of its officers, including entities
controlled by them, invested in K12 Inc. (“K12”) and Encore in prior
years.
The
investment in K12 was directly in the operating company and included investments
by the Former Executives. A significant portion of the Company’s investment and
one third of the direct investment made by the Former Executives in K12 were
sold in connection with its initial public offering of common stock during 2007
in which the Company realized a gain of $2,389 included in “Investment income,
net.” The Company sold its remaining investment in K12 in 2008 and realized a
gain of $1,467 which is included in “Investment income, net” (see Note
20).
The
Company’s direct ownership of Encore, which was 0.4% after the 2007 sale of a
substantial portion of its holdings in Encore, was contributed to and
subsequently distributed by the 2007 Trusts to the Former Executives in
connection with the Contractual Settlements. As a result of the 2007 sale of a
substantial portion of our interest in Encore, we no longer had the ability to
exercise significant influence over operating and financial policies of Encore
and we ceased accounting for our then remaining investment in Encore under the
equity method.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
Sale
of Deerfield capital investments
In
connection with the Deerfield Sale (see Note 3), the Company sold its 63.6%
capital interest in Deerfield to DFR. The remaining Deerfield capital
interests that were owned directly or indirectly by executives of Deerfield (the
“Deerfield Executives”), including one who was also a former director of the
Company (the “Deerfield Executive”), were also sold to DFR in connection with
the Deerfield Sale. All related rights that the Company had to
acquire the capital interests of Deerfield owned by two Deerfield Executives
were cancelled at that time. In addition, the rights of those two executives to
require the Company to acquire their economic interests were also cancelled in
connection with the Deerfield Sale (see below for the discussion of the
severance agreement with of one of these executives).
Ownership
in DFR
Prior to
2006, the Company purchased 1,000 shares of DFR (see Note 8) for $15,000, and
certain former officers (the “DFR Stock Purchasers”) purchased 115 shares of DFR
for a cost of $1,731. Such shares were all purchased at the same
price and terms as those shares purchased by third-party investors pursuant to
an initial public offering of DFR prior to 2006. Subsequently, certain of DFR
Stock Purchasers, but not the Company, acquired additional shares at various
prices in open-market transactions. The Company, through the date of
the Deerfield Sale, was the investment manager of DFR and, subsequent to the
Deerfield Sale, maintains one seat on its Board of Directors. Prior
to 2006, the Company received restricted investments consisting of 404 of DFR
restricted shares and options to purchase an additional 1,346 shares of stock of
DFR, which represented compensation granted in consideration of the Company’s
management of DFR. The restricted stock and options vested one-third
each in 2005 through 2007. In addition, during 2007 and 2006 the Company
received 21 and 52 shares, respectively, of DFR Incentive Fee Shares. In May
2006, the Company made a restricted stock award of 50 shares of DFR owned by it
to two of its then executives serving DFR. The vesting was
accelerated in connection with the Deerfield Sale and the $650 fair market value
of the DFR shares was amortized to “Depreciation and amortization” through that
date. In addition, in March 2007, the Company granted an aggregate 97 of the
vested DFR Restricted Shares owned by the Company as restricted stock to
additional then employees of the Company. The vesting of the shares is ratably
over a three-year period with the first one-third vesting in February
2008. With the exception of the March 2007 grant of the vested DFR
Restricted Shares to employees, all of the DFR Restricted Shares were
distributed to the members of Deerfield immediately prior to the Deerfield
Sale. In connection with the March 2007 award, the Company recorded the
$1,500 fair market value of DFR shares as of the date of grant as “Deferred
costs and other assets.” The remaining aggregate 206 unrestricted DFR
common shares, representing the portion of the DFR Restricted and Incentive Fee
Shares distributed to us in connection with the Deerfield Sale, and the 9,629
DFR preferred shares received in connection with the Deerfield Sale held by the
Company represented an ownership percentage in DFR of 14.7% as of December 30,
2007, on an as-if fully converted basis. Certain former officers of
Wendy’s/Arby’s had an approximate 1.5% ownership interest in DFR as of December
30, 2007.
For
further detail regarding the transactions that involved our ownership in DFR see
Note 8.
Deerfield
Sale
As
defined in an equity arrangement further described under “Principles of consolidation”
in Note 1, the Deerfield Sale is an event of dissolution of TDH. In connection
with its dissolution during April 2008, $743 was distributed to the minority
members of TDH, which included former members of our management.
In
accordance with an employment agreement with a Deerfield Executive who was also
a director of the Company through June 2007, Deerfield incurred expenses in 2007
through the date of the Deerfield Sale and 2006 of $170 and $478, respectively,
included in “General and administrative” in the accompanying Consolidated
Statements of Operations, to reimburse an entity of which the executive is the
principal owner for operating expenses related to the business usage of an
airplane.
Immediately
prior to the Deerfield Sale, the Company and one of the Deerfield Executives
entered into an agreement whereby such executive agreed to resign as an officer
and director of Deerfield upon the completion of the Deerfield Sale (the
“Deerfield Severance Agreement”). In exchange, the Company agreed to a severance
package in 2007 with a cost of approximately $2,600 which is included in
“General and administrative” in the accompanying Consolidated Statements of
Operations. The severance package was a continuing liability of Deerfield and,
as it was not to be paid by the Company, there is an equally offsetting amount
included in the gain related to the Deerfield Sale included in the “Gain on sale
of consolidated business.”
In
connection with the sale to another Deerfield Executive of an internally
developed financial model that the Company’s former asset management segment
chose not to use, in the fourth quarter of 2007, the Company recorded a gain of
$300. During 2007, the Company recognized a $3,025 impairment charge,
which is included in “Non-goodwill impairment” in the accompanying Consolidated
Statements of Operations, related to the then anticipated loss on the sale of
the model. This former executive also had certain rights which would have
required the Company to acquire his economic interests in Deerfield through July
2008, which were cancelled in connection
with the Deerfield Sale.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
The
Company was being reimbursed by the Former Executives for incremental operating
expenses related to certain personal usage of corporate aircraft through the
date of the Contractual Settlements (see Note 17). Such reimbursements for 2007
through July 1, 2007 and 2006 amounted to $668 and $620, respectively and have
been recognized as a reduction of “General and administrative” in the
accompanying Consolidated Statements of Operations. (See below for
discussion of arrangements since that time)
Corporate
Restructuring
Agreements
with former executives
In
connection with the Corporate Restructuring discussed in Note 17, the Company
entered into a series of agreements with the Former Executives and the
Management Company formed by the Former Executives and a director, who is also
the former Vice Chairman of the Company (collectively, the
“Principals”). These agreements are described in the paragraphs set
forth below.
Prior to
2006, the Principals started a series of equity investment funds (the “Equity
Funds”) that are separate and distinct from the Company and that are being
managed by the Principals and certain other former senior executives of the
Company (the “Management Company Employees”) through the Management
Company. Until June 29, 2007, the Management Company Employees
continued to receive their regular compensation from the Company and the Company
made their services available, as well as certain support services including
investment research, legal, accounting and administrative services, to the
Management Company. Through June 29, 2007 (see below) the Company was reimbursed
by the Management Company for the allocable cost of these services, including an
allocable portion of salaries, rent and various overhead costs. Such
allocated costs for 2007 (through June 29, 2007) and 2006 amounted to $2,515 and
$4,345, respectively, and have been recognized as reductions of “General and
administrative” in the accompanying Consolidated Statements of
Operations. As discussed further below, effective June 29, 2007 the
Management Company Employees became employees of the Management Company and are
no longer employed by the Company. Subsequent to June 29, 2007, the
Company continued to provide, and was reimbursed for, some minimal support
services to the Management Company. The Company has reduced its
incentive compensation expense for 2007 through June 29, 2007 and for the 2006
fiscal year by $2,700 and $7,400, respectively, for the Management Company’s
allocable portion of the incentive compensation attributable to the Management
Company Employees for the first six months of 2007 and for the 2006 fiscal
year. In addition, in 2007, the Company paid $171 to the Management
Company representing the obligation for accrued vacation of the Management
Company Employees as of June 29, 2007 assumed by the Management
Company.
As
part of the agreement with the Former Executives and in connection with the
Corporate Restructuring, the Company has a two-year transition services
agreement (the “Services Agreement”) with the Management Company beginning June
30, 2007 pursuant to which the Management Company provides the Company with a
range of professional and strategic services. Under the Services
Agreement, the Company is paying the Management Company $3,000 per quarter for
the first year of services and $1,750 per quarter for the second year of
services. The Company incurred $9,500 and $6,000 of such service fees
for 2008 and 2007, which are included in “General and administrative” in the
accompanying Consolidated Statement of Operations. In addition, effective as of
December 28, 2007, the Company and the Management Company entered into an
amendment to the Services Agreement providing for the payment to the Management
Company in 2008 of additional fees of $2,750, for services rendered during 2007,
and are attributable to the unanticipated and extensive time commitment of
Management Company Employees during 2007. The additional fees include
$1,925, in connection with the Wendy’s Merger, which are included in “Goodwill”
and $825 related to the Deerfield Sale which is included in the calculation of
the “Gain on sale of consolidated business”.
Obligations
to Former Executives
On June
29 and July 1, 2007, the Company funded the payment of the obligations due to
the Former Executives under the Contractual Settlements disclosed in Note 17,
net of applicable withholding taxes of $33,994, into the 2007
Trusts. The cash and investments in the 2007 Trusts, which included
any related investment income or loss, and additional amounts related to the
applicable withholding taxes not funded into the 2007 Trusts (see Note 17), was
paid to the Former Executives on December 30, 2007, six months following their
June 29, 2007 separation date.
Sale
of assets related to corporate restructuring
In July
2007, as part of the Corporate Restructuring, the Company sold substantially all
of the properties and other assets it owned and used at its former New York
headquarters to the Management Company for an aggregate purchase price of
$1,808, including $140 of sales taxes. The assets sold included
computers and other electronic equipment and furniture and furnishings. The
Company recognized a loss of $835, which is included in “Facilities relocation
and corporate restructuring” in the Consolidated Statements of Operations,
principally reflecting assets for which the fair value was less than book
value.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
Sublet
of New York office space
In
July 2008 and July 2007, the Company entered into agreements under which the
Management Company is subleasing (the “Subleases”) office space on two of the
floors of the Company’s former New York headquarters. Under the terms
of the Subleases, the Management Company is paying the Company approximately
$153 and $113, respectively, per month which includes an amount equal to the
rent the Company pays plus a fixed amount reflecting a portion of the increase
in the then fair market value of the Company’s leasehold interest as well as
amounts for property taxes and the other costs related to the use of the
space. Either the Management Company or the Company may terminate the
Subleases upon sixty days notice. The Company recognized $1,633 and
$680 from the Management Company under the Subleases for 2008 and 2007 which has
been recorded as a reduction of “General and administrative” expenses in the
accompanying Consolidated Statement of Operations.
Corporate
facility lease assignment
As of
June 30, 2007, the Company assigned the lease for a corporate facility to the
Management Company such that after that date, other than with respect to the
Company’s security deposit applicable to the lease, the Company has no further
rights or obligations with respect to the lease. The security deposit
of $113 remains the property of the Company and, upon the expiration of the
lease on July 31, 2010, is to be returned to the Company in full.
Executive
use of corporate aircraft
In August
2007, the Company entered into time share agreements whereby the Principals and
the Management Company may use the Company's corporate aircraft in exchange for
payment of the incremental flight and related costs of such aircraft. Such
reimbursements for 2008 and 2007 (the period from July 2, 2007 through December
30, 2007) amounted to $3,205 and $1,095 and have been recognized as a reduction
of “General and administrative” in the accompanying Consolidated Statements of
Operations. As of December 28, 2008, the Company was owed $247 and
$108 by the Principals and the Management Company, respectively, which was
received in 2009.
Sale
of helicopter interest
The
Management Company assumed the Company’s 25% fractional interest in a helicopter
(the “Helicopter Interest”) on October 1, 2008 for $1,860 which is the amount we
would have received under the relevant agreement, if we exercised our right to
sell the Helicopter Interest on October 1, 2008, which is equal to the then fair
value, less a remarketing fee. The Management Company paid the monthly
management fee and all other costs related to the Helicopter Interest to the
owner on behalf of the Company from July 1, 2007 until October 1,
2008.
All of
these agreements with the Former Executives and the Management Company were
negotiated and approved by a special committee of independent members of the
Company’s board of directors (the “Special Committee”). The Special
Committee was advised by independent outside counsel and worked with the
compensation committee and the performance compensation subcommittee of the
Company’s board of directors and its independent outside counsel and independent
compensation consultant.
Investments
in Equities Account
In
December 2005, the Company invested $75,000 in the Equities Account which is
managed by the Management Company and generally co-invests on a parallel basis
with the Equity Funds and had a carrying value of $37,698 and $99,320 as of
December 28, 2008 and December 30, 2007, respectively (see Note
8). The
carrying
value of the
Equities Account excludes $47,000 of restricted cash
transferred from the Equities Account to Wendy’s/Arby’s cash in
2008. The
Principals and certain former employees have invested in the Equity
Funds. Beginning January 1, 2008, we began to pay management and
incentive fees to the Management Company in an amount customary for other
unaffiliated third party investors. Prior thereto, we were not charged any
management fees.
On
September 12, 2008, 251 shares of Wendy’s common stock, which were included in
the Equities Account, were sold to the Management Company at the closing market
value as of the day we decided to sell the shares. The sale resulted in a loss
of $38.
RTM
Acquisition
During
2007 the Company paid $1,600 to settle a post-closing purchase price adjustment
provided for in the agreement and plan of merger pursuant to which the Company
acquired RTM. The sellers of RTM included certain current officers of a
subsidiary of the Company and a former director of the Company. The
Company has reflected such payment as an increase in “Goodwill” included in the
accompanying consolidated balance sheet (see Note
3).
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
At
January 1, 2006, the Company had a note receivable of $519 from a selling
stockholder of RTM who became a non-executive officer of a subsidiary of the
Company as a result of the RTM Acquisition. The principal amount of
the note was reported as the “Note receivable from non-executive officer”
component of “Stockholders’ equity” in the Company’s Consolidated Statement of
Stockholders' Equity as of January 1, 2006. The note bore interest at
a bank base rate plus 2%. The note together with $41 of accrued
interest was repaid by the officer in June 2006. The Company recorded
$21 of interest income on this note during 2006.
Following
the RTM Acquisition, the Company provided certain management services to certain
affiliates of RTM that the Company did not acquire including information
technology, risk management, accounting, tax and other management services
through May 7, 2006. The Company charged a monthly fee of $36 plus
out-of-pocket expenses for such services which aggregated $150 during 2006 and
was recognized as a reduction of “General and administrative” expenses in the
Consolidated Statements of Operations. The Company believes that
these fees approximated the cost to the Company of providing the management
services. On May 7, 2006, these affiliates of RTM were sold to an
unrelated third party. In addition, the Company continued to have
limited transactions with certain of these affiliates through May 7, 2006 which
resulted in the Company recording during 2006 (1) rental income of $22 for a
restaurant leased to one of the affiliates and (2) royalty expense of $10
related to the use of a brand owned by one of these affiliates in four
Company-owned restaurants.
Management
Interest in Franchisee
The
Company’s Vice Chairman and former President and Chief Operating Officer had an
equity interest in a franchisee that owns an Arby’s restaurant. That
franchisee was a party to a standard Arby’s franchise license agreement and paid
to Arby’s fees and royalty payments that unaffiliated third-party franchisees
pay. Under an arrangement that pre-dated the acquisition of units
from Sybra, Sybra managed the restaurant for the franchisee; however, the
Company did not receive any compensation for its services during
2006. In November 2006, the Company acquired the assets of the
franchisee for $121 in cash, its approximate fair value, which was entirely used
to satisfy outstanding liabilities of the franchisee. The Company’s
Vice Chairman and former President and Chief Operating Officer did not receive
any portion of the proceeds from this sale.
Charitable
contributions to The Arby’s Foundation Inc.
In 2007
and 2006 the Company made charitable contributions of $575 and $100,
respectively, to The Arby’s Foundation, Inc. (the “Foundation”), a
not-for-profit charitable foundation in which the Company has non-controlling
representation on the board of directors. The Company did not make any such
contributions during 2008. In addition, during 2008 and 2006 the
Company paid $500 and $502 of expenses, respectively, on behalf of the
Foundation primarily utilizing funds reimbursed to it by Pepsi as provided for
by the Pepsi contract (see Note 27). All such amounts are included in “General
and administrative” in the Consolidated Statements of Operations.
Sale
of company restaurants to former officer
During
2006, the Company sold nine of its restaurants to a former officer of its
restaurant segment for $3,400 in cash, which resulted in a pretax gain of $570
recognized as a reduction of "Depreciation and amortization" net of the
write-off of, among other assets and liabilities, allocated goodwill of
$2,091. The Company believes that such sale price represented the
then fair value of the nine restaurants.
Charitable
contributions to the Dave Thomas Foundation for Adoption
In 2008,
the Company pledged $1,000 to be donated to the Dave Thomas Foundation for
Adoption, a related party, which is expected to be funded in equal annual
installments over the next five years. The full pledge amount was
recorded in “General and administrative” in the Consolidated Statements of
Operations in 2008, with the first installment payment made in December
2008.
Wendy’s
Executive Officers
On
September 29, 2008, J. David
Karam, a minority shareholder, director and former president of Cedar
Enterprises, Inc., which directly or through affiliates is a Wendy’s franchisee
operator of 133 Wendy's restaurants, became President of Wendy’s. In
connection with Mr. Karam’s employment, Mr. Karam
resigned as a director and president of Cedar Enterprises, Inc. but retained his
minority ownership. After the Wendy’s Merger, we recorded $1,772 in
royalties and $1,318 in advertising fees from Cedar Enterprises and its
affiliates as a franchisee of Wendy’s. Cedar Enterprises, Inc.
and its affiliates also received $125 in remodeling incentives in 2008 from
Wendy's pursuant to a program generally available to Wendy's
franchisees. Mr. Karam was also a minority investor in two
other Wendy's franchisee operators, Emerald Food, Inc. and Diamond Foods,
L.L.C., which are operators of 44 and 16 Wendy's restaurants,
respectively. Mr. Karam disposed of his interests in these companies
effective November 5, 2008.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
Wendy’s
key executive agreements
In accordance with the merger
agreement, amounts due under the key executive agreements, deferred compensation
plan and supplemental executive retirement plans (SERPs) were funded into a
restricted account and are included in “Restricted cash equivalents” in the
Consolidated Balance Sheets. The corresponding liabilities are
included in “Accrued expenses and other current liabilities” and “Other
liabilities.”
In 2001,
a vacant property owned by Adams Packing Association, Inc. (“Adams”), an
inactive subsidiary of the Company, was listed by the United States
Environmental Protection Agency on the Comprehensive Environmental Response,
Compensation and Liability Information System (“CERCLIS”) list of known or
suspected contaminated sites. The CERCLIS listing appears to have
been based on an allegation that a former tenant of Adams conducted drum
recycling operations at the site from some time prior to 1971 until the late
1970s. The business operations of Adams were sold in December
1992. In February 2003, Adams and the Florida Department of
Environmental Protection (the “FDEP”) agreed to a consent order that provided
for development of a work plan for further investigation of the site and limited
remediation of the identified contamination. In May 2003, the FDEP
approved the work plan submitted by Adams’ environmental consultant and during
2004 the work under that plan was completed. Adams submitted its
contamination assessment report to the FDEP in March 2004. In August
2004, the FDEP agreed to a monitoring plan consisting of two sampling events
which occurred in January and June 2005 and the results were submitted to the
FDEP for its review. In November 2005, Adams received a letter from
the FDEP identifying certain open issues with respect to the
property. The letter did not specify whether any further actions are
required to be taken by Adams. Adams sought clarification from the
FDEP in order to attempt to resolve this matter. On May 1, 2007, the
FDEP sent a letter clarifying their prior correspondence and reiterated the open
issues identified in their November 2005 letter. In addition, the
FDEP offered Adams the option of voluntarily taking part in a recently adopted
state program that could lessen site clean up standards, should such a clean up
be required after a mandatory further study and site assessment
report. With our consultants and
outside counsel, we reviewed this option and sent our response and proposed work
plan to FDEP on April 24, 2008 and have commenced additional testing as
suggested by the FDEP and pursuant to the work plan submitted. Once
testing is completed Adams will provide an amended response to the
FDEP. Nonetheless, based on amounts spent prior to 2007 of
approximately $1,667 for all of these costs and after taking into consideration
various legal defenses available to us, including Adams, we expect that the
final resolution of this matter will not have a material effect on our financial
position or results of operations.
On April
25, 2008, a putative class action complaint was filed by Ethel Guiseppone, on
behalf of herself and others similarly situated, against Wendy’s, its directors,
the Company and Trian Partners, in the Franklin County, Ohio Court of Common
Pleas. A motion for leave to file an amended complaint was filed on June 19,
2008. The proposed amended complaint alleged 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 on April 23, 2008, and failure to disclose
material information related to the merger in Amendment No. 3 to the Form S-4
under the Securities Act of 1933 (the “Form S-4”). The proposed amended
complaint sought certification of the proceeding as a class action; preliminary
and permanent injunctions against disenfranchising the purported class and
consummating the merger; a declaration that the defendants breached their
fiduciary duties; costs and attorneys fees; and any other relief the court deems
proper and just.
Also on
April 25, 2008, a putative class action and derivative complaint was filed by
Cindy Henzel, on behalf of herself and others similarly situated, and
derivatively on behalf of Wendy’s, against Wendy’s and its directors in the
Franklin County, Ohio Court of Common Pleas. A motion for leave to file an
amended complaint was filed on June 16, 2008. The proposed amended complaint
alleges 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 on April 23, 2008, and failure to disclose material information
related to the merger in the Form S-4. The proposed amended complaint seeks
certification of the proceeding as a derivative and class action; an injunction
against consummating the merger and requiring the defendants to promptly hold an
annual meeting and to seek another merger partner; rescission of any part of the
merger agreement already implemented; a declaration that the defendants breached
their fiduciary duties; costs and attorneys fees; and any other relief the court
deems proper and just.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
On May
22, 2008, a putative class action complaint was filed by Ronald Donald Smith, on
behalf of himself and others similarly situated, against Wendy’s and its
directors in the Franklin County, Ohio Court of Common Pleas. A motion for leave
to file an amended complaint was filed on June 30, 2008. The proposed amended
complaint alleged 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 on April 23, 2008, and failure to disclose material information
related to the merger in the Form S-4. The proposed amended complaint sought
certification of the proceeding as a derivative and class action; an injunction
against consummating the merger and requiring the defendants to promptly hold an
annual meeting and to seek another merger partner; rescission of any part of the
merger agreement already implemented; a declaration that the defendants breached
their fiduciary duties; costs and attorneys fees; and any other relief the court
deems proper and just.
On June
13, 2008, a putative class action complaint was filed by Peter D. Ravanis and
Dorothea Ravanis, on behalf of themselves and others similarly situated, against
Wendy’s, its directors, and Triarc Companies, Inc. in the Supreme Court of the
State of New York, New York County. An amended complaint was filed on June 20,
2008. The amended complaint alleges 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 on April 23, 2008, and failure to disclose
material information related to the merger in the Form S-4. The amended
complaint seeks certification of the proceeding as a class action; preliminary
and permanent injunctions against consummating the merger; other equitable
relief; attorneys’ fees; and any other relief the court deems proper and just.
All parties to this case have jointly requested that the court stay the action
pending resolution of the Ohio cases.
On July
9, 2008, the parties to the three Ohio actions described above filed a
stipulation and proposed order that would consolidate the cases, provide for the
proposed amended complaint in the Henzel case to be the operative complaint in
each of the cases, designate one law firm as lead plaintiffs’ counsel, and
establish an answer date for the defendants in the consolidated case. The court
entered the order as proposed in all three cases on July 9, 2008.
On August
13, 2008, counsel for the parties to the Guiseppone, Henzel, Smith and Ravanis
cases described above entered into a memorandum of understanding in which they
agreed upon the terms of a settlement of all such lawsuits, which would include
the dismissal with prejudice, and release, of all claims against all the
defendants, including Wendy’s, its directors, us and Trian Partners. In
connection with the settlement, Wendy’s agreed to make certain additional
disclosures to its shareholders, which were contained in the Form S-4 and to pay
plaintiffs’ legal fees.
On
January 30, 2009, the parties entered into a Class and Derivative Action
Stipulation of Settlement. The settlement is subject to approval by
the Common Pleas Court of Franklin County, Ohio. On January 30, 2009,
the plaintiffs submitted an application for an order preliminarily approving the
settlement, certifying a class for settlement purposes only, providing for
notice to the class and setting a final settlement hearing. The court
has not yet ruled on that application. Although we expect the court
to approve the settlement, there can be no assurance that the court will do
so. If the court withholds approval, the proposed settlement may be
terminated.
The
defendants believe that the Guiseppone, Henzel, Smith and Ravanis cases
described above are without merit and intend to vigorously defend them in the
event that court approval is not obtained. While we do not believe that these
actions will have a material adverse effect on our financial condition or
results of operations, unfavorable rulings could occur. Were an unfavorable
ruling to occur, there exists the possibility of a material adverse impact on
our results of operations for the period in which the ruling occurs or for
future periods.
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 $6,943 as of
December 28, 2008. 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.
Since the
Wendy’s Merger, the Company participates in three national advertising funds
(the “Advertising Funds”) established to collect and administer funds
contributed for use in advertising and promotional programs. Contributions to
the Advertising Funds are required from both company-owned and franchise
restaurants and are based on a percentage of restaurant sales. In addition to
the contributions to the various Advertising Funds, company-owned and franchise
restaurants make additional contributions for local and regional advertising
programs. These include AFA Service Corporation (“AFA”), an independently
controlled advertising cooperative for Arby’s Company-owned and franchised
stores, as well as separate Wendy’s U.S. and Canadian Advertising
Funds.
In
accordance with SFAS No. 45, “Accounting for Franchisee Fee Revenue”, the
revenue, expenses and cash flows of the Advertising Funds are not included in
our Consolidated Statements of Operations or Consolidated Statements of Cash
Flows because
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
the
contributions to these Advertising Funds are designated for specific purposes,
and the Company acts as an, in substance, agent with regard to these
contributions. The assets held by these Advertising Funds are considered
restricted. The restricted assets and related restricted liabilities are
identified on our Consolidated Balance Sheets.
Restricted assets and related
liabilities of the Advertising Funds at December 28, 2008 are as
follows:
|
|
2008
|
|
Cash
and cash equivalents
|
|
$ |
29,270 |
|
Accounts
and notes receivable
|
|
|
39,976 |
|
Other
assets
|
|
|
11,893 |
|
Total
assets
|
|
$ |
81,139 |
|
|
|
|
|
|
Accounts
payable
|
|
|
32,220 |
|
Accrued
expenses and other current liabilities
|
|
|
54,457 |
|
Member’s
deficit
|
|
|
(5,538 |
) |
Total
liabilities and deficit
|
|
$ |
81,139 |
|
Wendy’s
U.S. advertising fund has a revolving line of credit of $25,000. The Company is
not the guarantor of the debt. The advertising fund facility was established to
fund the advertising fund operations. There are no borrowings outstanding
as of December 28, 2008.
AFA has
a $3,500 line of credit. The availability under the AFA line of
credit as of December 28, 2008 was $3,000. The Company is not the guarantor of
the debt.
The
Company's advertising expenses in 2008, 2007 and 2006 totaled $110,849, $79,270
and $78,619, respectively.
Subsequent
to the Wendy’s Merger, 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. Prior to the Wendy’s Merger and
the Deerfield Sale (see Note 3), we managed and internally reported our
operations as two business segments: (1) the operation and franchising of Arby’s
restaurants and (2) asset management (“Asset Management”). We
evaluate segment performance and allocate resources based on each segment’s
operating profit (loss).
The
following is a summary of the Company’s segment information:
|
|
Wendy’s
|
|
|
Arby’s
|
|
|
|
|
|
|
|
2008
|
|
restaurants
|
|
|
restaurants
|
|
|
Corporate
|
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
530,843 |
|
|
$ |
1,131,448 |
|
|
$ |
- |
|
|
$ |
1,662,291 |
|
Franchise
revenues
|
|
|
74,588 |
|
|
|
85,882 |
|
|
|
- |
|
|
|
160,470 |
|
|
|
|
605,431 |
|
|
|
1,217,330 |
|
|
|
- |
|
|
|
1,822,761 |
|
Depreciation
and amortization
|
|
|
23,852 |
|
|
|
61,206 |
|
|
|
3,257 |
|
|
|
88,315 |
|
Operating
(loss) profit
|
|
|
30,788 |
|
|
|
(395,304 |
) |
|
|
(49,134 |
) |
|
|
(413,650 |
) |
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67,009 |
) |
Gain
on early extinguishments of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,656 |
|
Investment
income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,438 |
|
Other
than temporary losses on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(112,741 |
) |
Other
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(606 |
) |
Loss
from continuing operations before income taxes and minority
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(580,912 |
) |
Benefit
from income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,294 |
|
Minority
interests in income of consolidated subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(340 |
) |
Loss
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(481,958 |
) |
Income
from discontinued operations, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,217 |
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(479,741 |
) |
|
|
Arby’s
|
|
|
Asset
|
|
|
|
|
|
|
|
2007
|
|
restaurants
|
|
|
management
|
|
|
Corporate
|
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
1,113,436 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,113,436 |
|
Franchise
revenues
|
|
|
86,981 |
|
|
|
- |
|
|
|
|
|
|
|
86,981 |
|
Asset
management revenues
|
|
|
- |
|
|
|
63,300 |
|
|
|
- |
|
|
|
63,300 |
|
|
|
|
1,200,417 |
|
|
|
63,300 |
|
|
|
- |
|
|
|
1,263,717 |
|
Depreciation
and amortization
|
|
|
56,909 |
|
|
|
4,951 |
|
|
|
4,417 |
|
|
|
66,277 |
|
Operating
(loss) profit
|
|
|
108,672 |
|
|
|
44,154 |
|
|
|
(132,926 |
) |
|
|
19,900 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,331 |
) |
Investment
income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,110 |
|
Other
than temporary losses on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,909 |
) |
Other
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,356 |
) |
Income
from continuing operations before income taxes and minority
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,414 |
|
Benefit
from income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,354 |
|
Minority
interests in income of consolidated subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,682 |
) |
(Loss)
income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,086 |
|
Income
from discontinued operations, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
995 |
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
16,081 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
|
|
Arby’s
|
|
|
Asset
|
|
|
|
|
|
|
|
2006
|
|
restaurants
|
|
|
management
|
|
|
Corporate
|
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
1,073,271 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,073,271 |
|
Franchise
revenues
|
|
|
82,001 |
|
|
|
|
|
|
|
|
|
|
|
82,001 |
|
Asset
management revenues
|
|
|
- |
|
|
|
88,006 |
|
|
|
- |
|
|
|
88,006 |
|
|
|
|
1,155,272 |
|
|
|
88,006 |
|
|
|
- |
|
|
|
1,243,278 |
|
Depreciation
and amortization
|
|
|
50,539 |
|
|
|
5,792 |
|
|
|
4,342 |
|
|
|
60,673 |
|
Operating
(loss) profit
|
|
|
95,345 |
|
|
|
15,832 |
|
|
|
(66,550 |
) |
|
|
44,627 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(114,088 |
) |
Loss
on early extinguishments of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,082 |
) |
Investment
income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,318 |
|
Other
than temporary losses on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,120 |
) |
Other
income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,677 |
|
Income
from continuing operations before income taxes and minority
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,332 |
|
Provision
for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,612 |
) |
Minority
interests in income of consolidated subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,523 |
) |
Loss
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,803 |
) |
Loss
from discontinued operations, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(129 |
) |
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(10,932 |
) |
Income
for our equity investments in TimWen and Deerfield are included in the Wendy’s
restaurants and asset management segments, respectively. Investment (loss)
income, net, of Deerfield was ($7,522) and $3,040 in 2007, through the date of
the Deerfield Sale, and 2006, respectively. EBITDA of the Asset
Management segment for 2007 included the gain on the Deerfield Sale of
$40,193.
|
|
Wendy’s
|
|
|
Arby’s
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
restaurants
|
|
|
restaurants
|
|
|
Corporate
|
|
|
Eliminations
|
|
|
Total
|
|
Total
assets
|
|
$ |
3,840,213 |
|
|
$ |
680,487 |
|
|
$ |
3,178,747 |
|
|
$ |
(3,053,827 |
) |
|
$ |
4,645,620 |
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,354,029 |
|
|
|
756,296 |
|
|
|
235,876 |
|
|
|
(83,872 |
) |
|
|
2,262,329 |
|
Total
stockholders’ equity
|
|
|
2,486,184 |
|
|
|
(75,809 |
) |
|
|
2,942,871 |
|
|
|
(2,969,955 |
) |
|
|
2,383,291 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
3,840,213 |
|
|
$ |
680,487 |
|
|
$ |
3,178,747 |
|
|
$ |
(3,053,827 |
) |
|
$ |
4,645,620 |
|
|
|
Arby’s
|
|
|
Asset
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
restaurants
|
|
|
management
|
|
|
Corporate
|
|
|
Eliminations
|
|
|
Total
|
|
Total
assets
|
|
$ |
1,127,772 |
|
|
$ |
136,646 |
|
|
$ |
599,367 |
|
|
$ |
(409,218 |
) |
|
$ |
1,454,567 |
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
974,107 |
|
|
|
29,845 |
|
|
|
(2,939 |
) |
|
|
4,681 |
|
|
|
1,005,694 |
|
Total
stockholders’ equity
|
|
|
153,665 |
|
|
|
106,801 |
|
|
|
602,306 |
|
|
|
(413,899 |
) |
|
|
448,873 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
1,127,772 |
|
|
$ |
136,646 |
|
|
$ |
599,367 |
|
|
$ |
(409,218 |
) |
|
$ |
1,454,567 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
|
|
Wendy’s
|
|
|
Arby’s
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
restaurants
|
|
|
restaurants
|
|
|
Corporate
|
|
|
Eliminations
|
|
|
Total
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short
term investments
|
|
$ |
- |
|
|
$ |
- |
|
|
|
162 |
|
|
$ |
- |
|
|
|
162 |
|
Long
term investments
|
|
|
96,523 |
|
|
|
- |
|
|
|
36,530 |
|
|
|
(1 |
) |
|
|
133,052 |
|
Total
investments
|
|
$ |
96,523 |
|
|
$ |
- |
|
|
$ |
36,692 |
|
|
$ |
(1 |
) |
|
$ |
133,214 |
|
|
|
Arby’s
|
|
|
Asset
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
restaurants
|
|
|
management
|
|
|
Corporate
|
|
|
Eliminations
|
|
|
Total
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short
term investments
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,608 |
|
|
$ |
- |
|
|
$ |
2,608 |
|
Long
term investments
|
|
|
- |
|
|
|
71,899 |
|
|
|
70,011 |
|
|
|
(1 |
) |
|
|
141,909 |
|
Total
investments
|
|
$ |
- |
|
|
$ |
71,899 |
|
|
$ |
72,619 |
|
|
$ |
(1 |
) |
|
$ |
144,517 |
|
|
|
Wendy’s
|
|
|
Arby’s
|
|
|
Asset
|
|
|
|
|
|
|
|
|
|
restaurants
|
|
|
restaurants
|
|
|
Management
|
|
|
Corporate
|
|
|
Total
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
capital expenditures
|
|
$ |
33,650 |
|
|
$ |
72,274 |
|
|
$ |
- |
|
|
$ |
1,065 |
|
|
$ |
106,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
capital expenditures
|
|
$ |
- |
|
|
$ |
72,883 |
|
|
$ |
41 |
|
|
$ |
66 |
|
|
$ |
72,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
capital expenditures
|
|
$ |
- |
|
|
$ |
71,910 |
|
|
$ |
7,869 |
|
|
$ |
471 |
|
|
$ |
80,250 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
Revenues
and long-lived asset information by geographic area are as follows:
|
|
U.S
|
|
|
Canada
|
|
|
Other
International
|
|
|
Total
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wendy’s
restaurants
|
|
$ |
548,792 |
|
|
$ |
53,201 |
|
|
$ |
3,438 |
|
|
$ |
605,431 |
|
Arby’s
restaurants
|
|
|
1,213,774 |
|
|
|
3,419 |
|
|
|
137 |
|
|
|
1,217,330 |
|
Consolidated
revenue
|
|
$ |
1,762,566 |
|
|
$ |
56,620 |
|
|
$ |
3,575 |
|
|
$ |
1,822,761 |
|
Long-lived
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wendy’s
restaurants
|
|
$ |
1,216,736 |
|
|
$ |
42,378 |
|
|
$ |
53 |
|
|
$ |
1,259,167 |
|
Arby’s
restaurants
|
|
|
495,743 |
|
|
|
10 |
|
|
|
- |
|
|
|
495,753 |
|
General
corporate
|
|
|
15,452 |
|
|
|
- |
|
|
|
- |
|
|
|
15,452 |
|
Consolidated
Assets
|
|
$ |
1,721,931 |
|
|
$ |
48,388 |
|
|
$ |
53 |
|
|
$ |
1,770,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arby’s
restaurants
|
|
$ |
1,196,706 |
|
|
$ |
3,574 |
|
|
$ |
137 |
|
|
$ |
1,200,417 |
|
Asset
management
|
|
|
63,300 |
|
|
|
- |
|
|
|
- |
|
|
|
63,300 |
|
Consolidated
revenue
|
|
$ |
1,260,006 |
|
|
$ |
3,574 |
|
|
$ |
137 |
|
|
$ |
1,263,717 |
|
Long-lived
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arby’s
restaurants
|
|
$ |
474,047 |
|
|
$ |
14 |
|
|
$ |
- |
|
|
$ |
474,061 |
|
General
corporate
|
|
|
30,813 |
|
|
|
- |
|
|
|
- |
|
|
|
30,813 |
|
Consolidated
Assets
|
|
$ |
504,860 |
|
|
$ |
14 |
|
|
$ |
- |
|
|
$ |
504,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arby’s
restaurants
|
|
$ |
1,151,786 |
|
|
$ |
3,371 |
|
|
$ |
115 |
|
|
$ |
1,155,272 |
|
Asset
management
|
|
|
88,006 |
|
|
|
- |
|
|
|
- |
|
|
|
88,006 |
|
Consolidated
revenue
|
|
$ |
1,239,792 |
|
|
$ |
3,371 |
|
|
$ |
115 |
|
|
$ |
1,243,278 |
|
Long-lived
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arby’s
restaurants
|
|
$ |
437,059 |
|
|
$ |
4,216 |
|
|
$ |
- |
|
|
$ |
441,275 |
|
Asset
management
|
|
|
11,663 |
|
|
|
|
|
|
|
|
|
|
|
11,663 |
|
General
corporate
|
|
|
35,546 |
|
|
|
- |
|
|
|
- |
|
|
|
35,546 |
|
Consolidated
Assets
|
|
$ |
484,268 |
|
|
$ |
4,216 |
|
|
$ |
- |
|
|
$ |
488,484 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
The table below sets forth summary
unaudited consolidated quarterly financial information for 2008 and
2007. The Company reports on a fiscal year typically consisting of 52
weeks ending on the Sunday closest to December 31. Deerfield reported
on a calendar year basis until the date of its sale on December 21, 2007.
Excluding Deerfield, all of the Company’s fiscal quarters in 2008 and 2007
contained 13 weeks. Deerfield has been included in this unaudited
consolidated quarterly financial information through the date of its sale on
December 21, 2007. Wendy’s has been included in this unaudited consolidated
quarterly financial information beginning with the date of the Wendy’s Merger on
September 29, 2008.
|
|
2008
Quarter Ended
|
|
|
|
March
30 (b)
|
|
|
June
29 (b)
|
|
|
September
28 (b)
|
|
|
December
28 (b)
|
|
Revenues
|
|
$ |
302,854 |
|
|
$ |
313,014 |
|
|
$ |
310,371 |
|
|
$ |
896,522 |
|
Cost
of sales (d)
|
|
|
233,445 |
|
|
|
244,992 |
|
|
|
239,880 |
|
|
|
700,317 |
|
Operating
(loss) profit
|
|
|
8,057 |
|
|
|
8,248 |
|
|
|
3,797 |
|
|
|
(433,752 |
) |
Loss
from continuing operations
|
|
|
(67,471 |
) |
|
|
(6,905 |
) |
|
|
(13,366 |
) |
|
|
(394,216 |
) |
Income
from discontinued operations (Note 23)
|
|
|
- |
|
|
|
- |
|
|
|
1,219 |
|
|
|
998 |
|
Net
loss
|
|
|
(67,471 |
) |
|
|
(6,905 |
) |
|
|
(12,147 |
) |
|
|
(393,218 |
) |
Basic
and diluted (loss) income per share from Class A common stock:
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
(.73 |
) |
|
|
(.07 |
) |
|
|
(.14 |
) |
|
|
(.84 |
) |
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
.01 |
|
|
|
- |
|
Net
(loss) income
|
|
|
(.73 |
) |
|
|
(.07 |
) |
|
|
(.13 |
) |
|
|
(.84 |
) |
Basic
and diluted (loss) income per share from Class B common stock:
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
(.73 |
) |
|
|
(.07 |
) |
|
|
(.14 |
) |
|
|
- |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
.01 |
|
|
|
- |
|
Net
(loss) income
|
|
|
(.73 |
) |
|
|
(.07 |
) |
|
|
(.13 |
) |
|
|
- |
|
|
|
|
|
|
|
2007
Quarter Ended
|
|
|
|
April
1
|
|
|
July
1 (c)
|
|
|
September30 (c)
|
|
|
December
30 (c)
|
|
Revenues
|
|
$ |
302,046 |
|
|
$ |
316,821 |
|
|
$ |
324,213 |
|
|
$ |
320,637 |
|
Cost
of sales (d)
|
|
|
212,701 |
|
|
|
225,545 |
|
|
|
231,869 |
|
|
|
224,335 |
|
Cost
of services
|
|
|
6,890 |
|
|
|
6,308 |
|
|
|
6,562 |
|
|
|
5,423 |
|
Operating
(loss) profit
|
|
|
8,484 |
|
|
|
(68,455 |
) |
|
|
21,944 |
|
|
|
57,927 |
|
(Loss)
income from continuing operations
|
|
|
7,210 |
|
|
|
(28,023 |
) |
|
|
3,731 |
|
|
|
32,168 |
|
(Loss)
income from discontinued operations (Note 23)
|
|
|
(149 |
) |
|
|
- |
|
|
|
- |
|
|
|
1,144 |
|
Net
(loss) income
|
|
|
7,061 |
|
|
|
(28,023 |
) |
|
|
3,731 |
|
|
|
33,312 |
|
Basic
and diluted (loss) income per share from Class A common stock:
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
.07 |
|
|
|
(.30 |
) |
|
|
.04 |
|
|
|
.33 |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
income (loss)
|
|
|
.07 |
|
|
|
(.30 |
) |
|
|
.04 |
|
|
|
.33 |
|
Basic
and diluted (loss) income per share from Class B common stock:
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
.08 |
|
|
|
(.30 |
) |
|
|
.04 |
|
|
|
.37 |
|
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
(loss) income
|
|
|
.08 |
|
|
|
(.30 |
) |
|
|
.04 |
|
|
|
.37 |
|
(a)
|
Basic
and diluted (loss) income per share amounts for the quarters have been
calculated separately on a consistent basis with the annual calculations
(see Note 5). Accordingly, quarterly amounts do not add to the
full year amounts because of differences in the weighted average shares
outstanding during each period.
|
In
connection with the Wendy’s Merger, Wendy’s/Arby’s stockholders approved a
charter amendment to convert each of the then existing Triarc Class B common
stock into one share of Wendy’s/Arby’s Class A common stock. Accordingly,
commencing with the 2008 fourth quarter, there is no longer any (loss) income
per share attributable to the Class B common stock.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(FORMERLY
TRIARC COMPANIES, INC.)
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts )
Diluted
loss per share for all quarters of 2008 and the second quarter of 2007 was the
same as basic loss per share for each period since the Company reported a
loss from continuing operations and, therefore, the effect of all potentially
dilutive securities on the loss from continuing operations per share would have
been anti-dilutive. The basic and diluted income per share for the first, third
and fourth quarters of 2007 are the same since the difference is less than one
cent in each quarter.
(b)
|
The
operating (loss) profit was materially affected by Goodwill impairment of
$460,075 for the fourth quarter of 2008 (see Note 18). The effect
of the other than temporary losses on investments on net (loss)
income for the first, second, third and fourth quarters was ($68,086),
($2,205), ($5,103) and ($20,825), respectively, due to other than
temporary losses on investments, after income tax benefits of $0, $1,295,
$2,997 and $12,230, respectively. The effect on net (loss)
income for the fourth quarter of the goodwill impairment was $391,735,
after a tax benefit of $68,340.
|
(c)
|
The operating (loss) profit was materially affected by (1)
corporate restructuring charges of $79,044, $1,807 and $4,163 for the second, third and fourth
quarters of 2007, respectively (see Note 17) and (2) by the
$40,193 gain related to the Deerfield
Sale (see Note 3) in the fourth quarter of
2007. The effect on net (loss) income for the second, third and fourth
quarters was ($51,379), ($1,175) and $23,420, respectively, after income tax
provision
(benefit) of
($27,665), ($633) and $12,610, respectively. In
addition, net loss
for the second quarter of 2007 was favorably affected by a $12,800 previously unrecognized prior
year contingent tax benefit related to certain severance obligations to
the Company’s Former
Executives.
|
(d)
|
We
have reclassified Advertising into “Cost of sales” for all
periods.
|
Item
9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
Not
applicable.
Item
9A. Controls and
Procedures.
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and our Senior
Vice President and Chief Financial Officer, carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of
1934, as amended (the “Exchange Act”)) as of December 28, 2008. Based
on that evaluation, our Chief Executive Officer and our Senior Vice President
and Chief Financial Officer have concluded that, as of December 28, 2008, our
disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act was recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission (the “SEC”).
Wendy’s
International, Inc.
As noted
below in Management's Report on Internal Control Over Financial Reporting,
pursuant to guidance provided by the SEC, we have excluded from our assessment
of the effectiveness of internal control over financial reporting as of December
28, 2008, Wendy’s International, Inc. (“Wendy’s”), a business we acquired on
September 29, 2008.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) of the Exchange
Act). Our management, with the participation of our Chief Executive
Officer and our Senior Vice President and Chief Financial Officer, carried out
an assessment of the effectiveness of our internal control over financial
reporting as of December 28, 2008. The assessment was performed using
the criteria for effective internal control reflected in the Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
Due to
the close proximity of the completion of the Wendy's Merger with management's
evaluation of the effectiveness of our internal control over financial reporting
and our ongoing merger-related integration activities, we have excluded Wendy’s
and its subsidiaries from our assessment of the effectiveness of internal
control over financial reporting as of December 28, 2008. Wendy’s and
its subsidiaries accounted for $605,431 (33%) of our $1,822,761 of consolidated
2008 fiscal year revenues, had $30,788 of operating profit within our $(413,650)
of consolidated 2008 fiscal year operating loss and accounted for $3,840,213
(83%) of our $4,645,620 of consolidated assets as of December 28,
2008. Collectively, the entities comprising Wendy’s are “significant
subsidiaries” (as defined in Regulation S-X under the Exchange
Act).
Based on
our assessment of the system of internal control, management believes that, as
of December 28, 2008, our internal control over financial reporting was
effective.
Our
independent registered public accounting firm, Deloitte & Touche LLP has
issued an attestation report dated March 13, 2009, on our internal control over
financial reporting.
Changes
in Internal Control Over Financial Reporting
On
September 29, 2008, we acquired Wendy’s. As part of our integration
activities, we have begun to incorporate our controls and procedures into this
recently acquired business. During the fourth quarter of 2008 the
financial reporting and income tax accounting processes of Wendy’s were
integrated into our accounting processes. The integrated accounting
processes were used for the preparation of financial statements and other
information presented in this Annual Report on Form 10-K. There were
no other changes in our internal control over financial reporting made during
our most recent fiscal quarter that materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting. We
expect further integration of Wendy's processes into our processes in
2009.
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 our Senior Vice President 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.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Wendy’s/Arby’s
Group, Inc.
Atlanta,
Georgia
We have
audited the internal control over financial reporting of Wendy’s/Arby’s Group,
Inc. and subsidiaries (the "Company") as of December 28, 2008, based on criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. As described in Management’s
Report on Internal Control Over Financial Reporting, management excluded from
its assessment the internal control over financial reporting at Wendy’s
International, Inc. which was acquired on September 29, 2008 and accounted for
$605,431 (33%) of the Company’s $1,822,761 of consolidated 2008 revenues,
$30,788 of operating profit within the Company’s $(413,650) of
consolidated 2008 operating loss and $3,840,213 (83%) of the
Company’s $4,645,620 of consolidated assets as of December 28,
2008. Accordingly, our audit did not include the internal control over
financial reporting at Wendy’s International, Inc. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Company's
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 28, 2008, based on the criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s consolidated financial statements
as of and for the year ended December 28, 2008 and our report dated March 13,
2009 expressed an unqualified opinion on those financial
statements.
/s/
Deloitte & Touche LLP
Atlanta,
Georgia
March 13,
2009
Item
9B. Other
Information.
None.
PART
III
Items 10, 11, 12, 13 and
14.
The
information required by Items 10, 11, 12, 13 and 14 will be furnished on or
prior to April 27, 2009 (and is hereby incorporated by reference) by an
amendment hereto or pursuant to a definitive proxy statement involving the
election of directors pursuant to Regulation 14A that will contain such
information. Notwithstanding the foregoing, information appearing in
the section “Audit Committee Report” shall not be deemed to be incorporated by
reference in this Form 10-K.
PART
IV
Item
15. Exhibits and Financial Statement
Schedules.
(a)
1. Financial
Statements:
See Index
to Financial Statements (Item 8).
2. Financial
Statement Schedules:
All
schedules have been omitted since they are either not applicable or the
information is contained elsewhere in “Item 8. Financial Statements
and Supplementary Data.”
3. Exhibits:
Copies of
the following exhibits are available at a charge of $.25 per page upon written
request to the Secretary of Wendy’s/Arby’s Group, Inc. at 1155 Perimeter Center
West, Atlanta, Georgia 30338. Exhibits that are incorporated by
reference to documents filed previously by the Company under the Securities
Exchange Act of 1934, as amended, are filed with the Securities and Exchange
Commission under File No. 1-2207 for documents filed by the registrant or File
No. 1-8116 for documents filed by Wendy’s International, Inc.
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).
|
2.3
|
Agreement
and Plan of Merger, dated as of December 17, 2007, by and among Deerfield
Triarc Capital Corp., DFR Merger Company, LLC, Deerfield & Company LLC
and, solely for the purposes set forth therein, Triarc Companies, Inc. (in
such capacity, the Sellers’ Representative, incorporated herein by
reference to Exhibit 2.1 to Triarc’s Current Report on Form 8-K dated
December 21, 2007 (SEC file No. 001-02207).
|
3.1
|
Certificate
of Incorporation of Triarc Companies, Inc., as currently in effect,
incorporated herein by reference to Exhibit 3.1 to Triarc’s Current Report
on Form 8-K dated June 9, 2004 (SEC file no.
001-02207).
|
3.2
|
Amendment
to the Certificate of Incorporation of Triarc Companies, Inc.,
incorporated herein by reference to Exhibit 3.1 to Wendy’s/Arby’s Group’s
Current Report on Form 8-K dated September 29, 2008 (SEC file no.
001-02207).
|
3.3
|
Amended
and Restated By-laws of Wendy’s/Arby’s Group, Inc., incorporated herein by
reference to Exhibit 3.2 to Wendy’s/Arby’s Group’s Current Report on Form
8-K dated September 29, 2008 (SEC file no. 001-02207).
|
4.1
|
Indenture,
dated as of May 19, 2003, between Triarc Companies, Inc. and Wilmington
Trust Company, as Trustee, incorporated herein by reference to Exhibit 4.1
to Triarc’s Registration Statement on Form S-3 dated June 19, 2003 (Reg.
no. 333-106273).
|
4.2
|
Supplemental
Indenture, dated as of November 21, 2003, between Triarc Companies, Inc.
and Wilmington Trust Company, as Trustee, incorporated herein by reference
to Exhibit 4.3 to Triarc’s Registration Statement on Form S-3 dated
November 24, 2003 (Reg. no. 333-106273).
|
4.3
|
Second
Supplemental Indenture, dated as of September 29, 2008, between Triarc
Companies, Inc. and Wilmington Trust Company, as Trustee, incorporated
herein by reference to Exhibit 4.1 to Wendy’s/Arby’s Group’s Current
Report on Form 8-K dated September 29, 2008 (SEC file no.
001-02207).
|
4.4
|
Indenture
between Wendy’s International, Inc. and Bank One, National Association,
pertaining to 6.25% Senior Notes due November 15, 2011 and 6.20% Senior
Notes due June 15, 2014, incorporated herein by reference to Exhibit 4(i)
of the Wendy’s International, Inc. Form 10-K for the year ended December
30, 2001 (SEC file no. 001-08116).
|
10.1
|
Triarc
Companies, Inc. Amended and Restated 1997 Equity Participation Plan,
incorporated herein by reference to Exhibit 10.2 to Triarc’s Current
Report on Form 8-K dated May 19, 2005 (SEC file no.
001-02207).**
|
10.2
|
Form
of Non-Incentive Stock Option Agreement under the Triarc Companies, Inc.
Amended and Restated 1997 Equity Participation Plan, incorporated herein
by reference to Exhibit 10.6 to Triarc’s Current Report on Form 8-K dated
March 16, 1998 (SEC file no. 001-02207).**
|
10.3
|
Triarc
Companies, Inc. Amended and Restated 1998 Equity Participation Plan,
incorporated herein by reference to Exhibit 10.3 to Triarc’s Current
Report on Form 8-K dated May 19, 2005 (SEC file no.
001-02207).**
|
10.4
|
Form
of Non-Incentive Stock Option Agreement under the Triarc Companies, Inc.
Amended and Restated 1998 Equity Participation Plan, incorporated herein
by reference to Exhibit 10.2 to Triarc’s Current Report on
Form 8-K dated May 13, 1998 (SEC file
no. 001-02207).**
|
10.5
|
|
10.6
|
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 herein by reference to Exhibit 99.6 to Wendy’s/Arby’s
Group’s Current Report on Form 8-K dated December 22, 2008 (SEC file no.
001-02207).**
|
10.7
|
|
10.8
|
1999
Executive Bonus Plan, incorporated herein by reference to Exhibit A to
Triarc’s 1999 Proxy Statement (SEC file no.
001-02207).**
|
10.9
|
Amendment
to the Triarc Companies, Inc. 1999 Executive Bonus Plan, dated as of June
22, 2004, incorporated herein by reference to Exhibit 10.1 to Triarc’s
Current Report on Form 8-K dated June 1, 2005 (SEC file no.
001-02207).**
|
10.10
|
Amendment
to the Triarc Companies, Inc. 1999 Executive Bonus Plan effective as of
March 26, 2007, incorporated herein by reference to Exhibit 10.2 to
Triarc’s Current Report on Form 8-K dated June 6, 2007 (SEC file no.
001-02207).**
|
10.11
|
Wendy’s
International, Inc. 2003 Stock Incentive Plan, incorporated herein by
reference to Exhibit 10(f) of the Wendy’s International, Inc. Form 10-Q
for the quarter ended April 2, 2006 (SEC file no.
001-08116).**
|
10.12
|
|
10.13
|
Wendy’s
International, Inc. 2007 Stock Incentive Plan, incorporated herein by
reference to Annex C to the Wendy’s International, Inc. Definitive 2007
Proxy Statement, dated March 12, 2007 (SEC file no.
001-08116).**
|
10.14
|
First
Amendment to the Wendy’s International, Inc. 2007 Stock Incentive Plan,
incorporated herein by reference to Exhibit 10(d) of the Wendy’s
International, Inc. Form 10-Q for the quarter ended September 30, 2007
(SEC file no. 001-08116).**
|
10.15
|
|
10.16
|
Wendy’s
International, Inc. Supplemental Executive Retirement Plan, incorporated
herein by reference to Exhibit 10(f) of the Wendy’s International, Inc.
Form 10-K for the year ended December 29, 2002 (SEC file no.
001-08116).**
|
10.17
|
First
Amendment to the Wendy’s International, Inc. Supplemental Executive
Retirement Plan, incorporated herein by reference to Exhibit 10(f) of the
Wendy’s International, Inc. Form 10-K for the year ended December 31,
2006 (SEC file no. 001-08116).**
|
10.18
|
Amended
and Restated Wendy’s International, Inc. Supplemental Executive Retirement
Plan No. 2, incorporated herein by reference to Exhibit 10(b) of the
Wendy’s International, Inc. Form 10-Q for the quarter ended September 30,
2007 (SEC file no 001-08116).**
|
10.19
|
Amended
and Restated Credit Agreement, dated as of July 25, 2005, amended and
restated as of March 11, 2009, among Wendy’s International, Inc., Wendy’s
International Holdings, LLC, Arby’s Restaurant Group, Inc., Arby's
Restaurant Holdings, LLC, Triarc Restaurant Holdings, LLC, the Lenders and
Issuers party thereto, Citicorp North America, Inc., as administrative
agent and collateral agent, Bank of America, N.A. and Credit Suisse,
Cayman Islands Branch, as co-syndication agents, Wachovia Bank, National
Association, SunTrust Bank and GE Capital Franchise Finance Corporation,
as co-documentation agents, Citigroup Global Markets Inc., Banc of America
Securities LLC and Credit Suisse, Cayman Islands Branch, as joint lead
arrangers and joint book-running managers, incorporated by reference to
Exhibit 10.1 to Wendy's/Arby's Group's Current Report on Form 8-K filed on
March 12, 2009 (SEC file no. 001-02207).
|
10.20
|
Amended
and Restated Pledge and Security Agreement dated March 11, 2009, by and
between Wendy’s International Inc., Wendy’s International Holdings,
LLC, Arby's Restaurant Group, Inc., and Arby’s Restaurant Holdings,
LLC, and Citicorp North America, Inc., as collateral agent incorporated by
reference to Exhibit 10.2 to Wendy’s/Arby’s Group’s Current Report on Form
8-K filed on March 12, 2009 (SEC file no. 001-02207).
|
10.21
|
Assignment
of Rights Agreement between Wendy’s International, Inc. and Mr. R. David
Thomas, incorporated herein by reference to Exhibit 10(c) of the Wendy’s
International, Inc. Form 10-K for the year ended December 31, 2000
(SEC file no. 001-08116).
|
10.22
|
Form
of Guaranty Agreement dated as of March 23, 1999 among National
Propane Corporation, Triarc Companies, Inc. and Nelson Peltz and
Peter W. May, incorporated herein by reference to Exhibit 10.30 to
Triarc’s Annual Report on Form 10-K for the fiscal year ended January 3,
1999 (SEC file no. 001-02207).
|
10.23
|
Indemnity
Agreement, dated as of October 25, 2000 between Cadbury Schweppes plc
and Triarc Companies, Inc., incorporated herein by reference to
Exhibit 10.1 to Triarc’s Current Report on Form 8-K dated
November 8, 2000 (SEC file no. 001-02207).
|
10.24
|
Amended
and Restated Investment Management Agreement, dated as of April 30, 2007,
between TCMG-MA, LLC and Trian Fund Management, L.P., incorporated herein
by reference to Exhibit 10.2 to Triarc’s Current Report on Form 8-K dated
April 30, 2007 (SEC file no. 001-02207).
|
10.25
|
Separation
Agreement, dated as of April 30, 2007, between Triarc Companies, Inc. and
Nelson Peltz, incorporated herein by reference to Exhibit 10.3 to Triarc’s
Current Report on Form 8-K dated April 30, 2007 (SEC file no.
001-02207).**
|
10.26
|
Letter
Agreement dated as of December 28, 2007, between Triarc Companies, Inc.
and Nelson Peltz., incorporated herein by reference to Exhibit 10.2 to
Triarc’s Current Report on Form 8-K dated January 4, 2008 (SEC file No.
001-02207).**
|
10.27
|
Separation
Agreement, dated as of April 30, 2007, between Triarc Companies, Inc. and
Peter W. May, incorporated herein by reference to Exhibit 10.4 to Triarc’s
Current Report on Form 8-K dated April 30, 2007 (SEC file no.
001-02207).**
|
10.28
|
Letter
Agreement dated as of December 28, 2007, between Triarc Companies, Inc.
and Peter W. May, incorporated herein by reference to Exhibit 10.3 to
Triarc’s Current Report on Form 8-K dated January 4, 2008 (SEC file No.
001-02207).**
|
10.29
|
Services
Agreement, dated as of April 30, 2007, by and among Triarc Companies, Inc.
and Trian Fund Management, L.P., incorporated herein by reference to
Exhibit 10.1 to Triarc’s Current Report on Form 8-K dated April 30, 2007
(SEC file no. 001-02207).
|
10.30
|
Letter
Agreement dated as of December 28, 2007, between Triarc Companies, Inc.
and Trian Fund Management, L.P., incorporated herein by reference to
Exhibit 10.1 to Triarc’s Current Report on Form 8-K dated January 4, 2008
(SEC file No. 001-02207).
|
10.31
|
Assignment
and Assumption of Lease, dated as of June 30, 2007, between Triarc
Companies, Inc. and Trian Fund Management, L.P., incorporated herein by
reference to Exhibit 10.1 to Triarc’s Current Report on Form 8-K dated
August 10, 2007 (SEC file no. 001-02207).
|
10.32
|
Bill
of Sale dated July 31, 2007, by Triarc Companies, Inc. to Trian Fund
Management, L.P., incorporated herein by reference to Exhibit 10.2 to
Triarc’s Current Report on Form 8-K dated August 10, 2007 (SEC file no.
001-02207).
|
10.33
|
Agreement
of Sublease between Triarc Companies, Inc. and Trian Fund Management,
L.P., incorporated herein by reference to Exhibit 10.4 to Triarc’s Current
Report on Form 8-K dated August 10, 2007 (SEC file no.
001-02207).
|
10.34
|
Form
of Aircraft Time Sharing Agreement between Triarc Companies, Inc. and each
of Trian Fund Management, L.P., Nelson Peltz, Peter W. May and Edward P.
Garden, incorporated herein by reference to Exhibit 10.5 to Triarc’s
Current Report on Form 8-K dated August 10, 2007 (SEC file no.
001-02207).
|
10.35
|
Form
of Aircraft Time Sharing Agreement between Triarc Companies, Inc., 280
Holdings, LLC and each of Trian Fund Management, L.P., Nelson Peltz, Peter
W. May and Edward P. Garden, incorporated herein by reference to Exhibit
10.56 to Triarc’s Current Report on Form 8-K dated August 10, 2007 (SEC
file no. 001-02207).
|
10.36
|
|
10.37
|
Letter
Agreement dated August 6, 2007, between Triarc Companies, Inc. and Trian
Fund Management, L.P., incorporated herein by reference to Exhibit 10.7 to
Triarc’s Current Report on Form 8-K dated August 10, 2007 (SEC file No.
001-02207).
|
10.38
|
Series
A Note Purchase Agreement, dated as of December 21, 2007, by and among DFR
Merger Company, LLC, Deerfield & Company LLC, Deerfield Triarc Capital
Corp., Triarc Deerfield Holdings, LLC (as administrative holder and
collateral agent) and the purchasers signatory thereto, incorporated
herein by reference to Exhibit 10.1 to Triarc’s Current Report on Form 8-K
dated December 27, 2007 (SEC file no. 001-02207).
|
10.39
|
Collateral
Agency and Intercreditor Agreement, dated as of December 21, 2007, by and
among Triarc Deerfield Holdings, LLC, Jonathan W. Trutter, Paula Horn and
the John K. Brinckerhoff and Laura R. Brinckerhoff Revocable Trust, as
holders of the Series A Notes referenced therein, Sachs Capital Management
LLC, Spensyd Asset Management LLLP and Scott A. Roberts, as holders of the
Series B Notes referenced therein, Triarc Deerfield Holdings, LLC, as
collateral agent, Deerfield & Company LLC and Deerfield Triarc Capital
Corp., incorporated herein by reference to Exhibit 10.2 to Triarc’s
Current Report on Form 8-K dated December 27, 2007 (SEC file no.
001-02207).
|
10.40
|
Agreement
dated November 5, 2008 by and between Wendy’s/Arby’s Group, Inc. and Trian
Partners, L.P., Trian Partners Master Fund, L.P., Trian Partners Parallel
Fund I, L.P., Trian Partners Parallel Fund II, L.P., Trian Fund
Management, L.P., Nelson Peltz, Peter W. May and Edward P. Garden,
incorporated by reference to Exhibit 10.1 to Wendy’s/Arby’s Group’s
Current Report on Form 8-K filed on November 12, 2008 (SEC file no.
001-02207).
|
10.41
|
Consulting
and Employment Agreement dated July 25, 2008 between Triarc Companies,
Inc. and J. David Karam, incorporated by reference to Exhibit 99.1 to
Triarc’s Current Report on Form 8-K dated July 25, 2008 (SEC file no.
001-02207).**
|
10.42
|
Amended
and Restated Letter Agreement dated as of December 18, 2008 between Thomas
A. Garrett and Arby’s Restaurant Group, Inc., incorporated by reference to
Exhibit 99.1 to Wendy’s/Arby’s Group’s Current Report on Form 8-K filed on
December 22, 2008 (SEC file no. 001-02207).**
|
10.43
|
Amended
and Restated Letter Agreement dated as of December 18, 2008 between
Sharron Barton and Wendy’s/Arby’s Group, Inc., incorporated by reference
to Exhibit 99.2 to Wendy’s/Arby’s Group’s Current Report on Form 8-K filed
on December 22, 2008 (SEC file no. 001-02207).**
|
10.44
|
Amended
and Restated Letter Agreement dated as of December 18, 2008 between Nils
H. Okeson and Wendy’s/Arby’s Group, Inc., incorporated by reference to
Exhibit 99.3 to Wendy’s/Arby’s Group’s Current Report on Form 8-K filed on
December 22, 2008 (SEC file no. 001-02207).**
|
10.45
|
Amended
and Restated Letter Agreement dated as of December 18, 2008 between
Stephen E. Hare and Wendy’s/Arby’s Group, Inc., incorporated by reference
to Exhibit 99.4 to Wendy’s/Arby’s Group’s Current Report on Form 8-K filed
on December 22, 2008 (SEC file no. 001-02207).**
|
10.46
|
Amended
and Restated Letter Agreement dated as of December 18, 2008 between Roland
C. Smith and Wendy’s/Arby’s Group, Inc., incorporated by reference to
Exhibit 99.5 to Wendy’s/Arby’s Group’s Current Report on Form 8-K filed on
December 22, 2008 (SEC file no. 001-02207).**
|
10.47
|
|
10.48
|
Form
of Indemnification Agreement between Arby’s Restaurant Group, Inc. and
certain directors, officers and employees thereof, incorporated by
reference to Exhibit 10.40 to Triarc’s Annual Report on Form 10-K for the
fiscal year ended December 30, 2007 (SEC file no.
001-02207).**
|
10.49
|
Form
of Indemnification Agreement for officers and employees of Wendy’s
International, Inc. and its subsidiaries, incorporated herein by reference
to Exhibit 10 of the Wendy’s International, Inc. Current Report on Form
8-K filed July 12, 2005 (SEC file no. 001-08116).**
|
10.50
|
Form
of First Amendment to Indemnification Agreement between Wendy’s
International, Inc. and its directors and certain officers and employees,
incorporated herein by reference to Exhibit 10(b) of the Wendy’s
International, Inc. Form 10-Q for the quarter ended June 29, 2008 (SEC
file no. 001-08116).**
|
21.1
|
|
23.1
|
|
31.1
|
|
31.2
|
|
32.1
|
|
**
|
Identifies
a management contract or compensatory plan or
arrangement.
|
Instruments
defining the rights of holders of certain issues of long-term debt of the
Company and its consolidated subsidiaries have not been
filed as exhibits to this Form 10-K because the authorized principal amount of
any one of such issues does not exceed 10% of the total assets of the Company
and its subsidiaries on a consolidated basis. The Company agrees to furnish a
copy of each of such instruments to the Commission upon
request.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
WENDY’S/ARBY’S
GROUP, INC.
(Registrant)
|
Dated:
March 13, 2009
|
By: /s/
Roland
C. Smith
|
|
Roland
C. Smith
|
|
President
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below on March 13, 2009 by the following persons on behalf of the
registrant in the capacities indicated.
Signature
|
Titles
|
/s/
Roland C. Smith
|
President,
Chief Executive Officer and Director
|
(Roland
C. Smith)
|
(Principal
Executive Officer)
|
/s/
Stephen E. Hare
|
Senior
Vice President and Chief Financial Officer
|
(Stephen
E. Hare)
|
(Principal
Financial Officer)
|
/s/
Steven B. Graham
|
Senior
Vice President and Chief Accounting Officer
|
(Steven
B. Graham)
|
(Principal
Accounting Officer)
|
/s/
Nelson Peltz
|
Chairman
and Director
|
(Nelson
Peltz)
|
|
/s/
Peter W. May
|
Vice
Chairman and Director
|
(Peter
W. May)
|
|
/s/
Hugh L. Carey
|
Director
|
(Hugh
L. Carey)
|
|
/s/
Clive Chajet
|
Director
|
(Clive
Chajet)
|
|
/s/
Edward P. Garden
|
Director
|
(Edward
P. Garden)
|
|
/s/
Janet Hill
|
Director
|
(Janet
Hill)
|
|
/s/
Joseph A. Levato
|
Director
|
(Joseph
A. Levato)
/s/
J. Randolph Lewis
|
Director
|
(J.
Randolph Lewis)
|
|
/s/
David E. Schwab II
|
Director
|
(David
E. Schwab II)
/s/
Raymond S. Troubh
|
Director
|
(Raymond
S. Troubh)
/s/
Jack G. Wasserman
|
Director
|
(Jack
G. Wasserman)
|
|