form10-k_030410.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 JANUARY 3, 2010
OR
( )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE
TRANSITION PERIOD FROM _____________ TO ______________.
COMMISSION
FILE NUMBER 1-2207
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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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|
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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
|
Name
of Each Exchange on Which Registered
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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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
□Yes □No
Indicate
by check mark 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. ý
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer ý
|
Accelerated
filer □
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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 28, 2009 was approximately
$1,322,779,910. As of February 26, 2010, there were 443,829,031
shares of the registrant's 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 January 3, 2010.
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”) was
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 or to national or local advertising organizations,
and the ability of our franchisees to open new restaurants in accordance
with their development commitments, including their ability to finance
restaurant development and
remodels;
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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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· availability
and cost of insurance;
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·
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adverse
weather conditions;
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·
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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 regulatory requirements, including franchising laws,
accounting standards, payment card industry rules, overtime rules, minimum
wage rates, government-mandated health benefits, tax legislation and
menu-board labeling requirements;
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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 and high unemployment rates on
consumer spending, 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
effects of charges for impairment of goodwill or for the impairment of
other long-lived assets due to deteriorating operating
results;
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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 our
wholly-owned subsidiary holding company Wendy’s/Arby’s Restaurants, LLC
(“Wendy’s/Arby’s Restaurants”). Wendy’s/Arby’s Restaurants is the
parent company of Wendy’s International, Inc. (“Wendy’s”) and Arby’s Restaurant
Group, Inc. (“ARG”), which are the owners and franchisors of the Wendy’s® and
Arby’s® restaurant systems, respectively. As of January 3, 2010, the
Wendy’s restaurant system was comprised of 6,541 restaurants, of which 1,391
were owned and operated by the Company. As of January 3, 2010, the
Arby’s restaurant system was comprised of 3,718 restaurants, of which 1,169 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 Class A
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. In connection with the May 28, 2009 amendment and restatement
of our Certificate of Incorporation, Class A Common Stock was redesignated as
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.
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. 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 25 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 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.
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 January 3, 2010, there
were 6,541 Wendy’s restaurants in operation in the United States and in 21
foreign countries and U. S. territories. Of these restaurants, 1,391 were
operated by Wendy’s and 5,150 by a total of 487
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 and others; (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 is also a partner in a Canadian
restaurant real estate joint venture with Tim Hortons, Inc. The
joint venture owns Wendy’s/Tim Hortons combo units in Canada. As of
January 3, 2010, there were 105 Wendy’s restaurants in operation that were owned
by the joint venture. The Tim Hortons menu includes premium
coffee, flavored cappuccinos, specialty teas, home-style soups, fresh sandwiches
and fresh baked goods.
Wendy’s
Restaurants
Wendy’s
opened its first restaurant in Columbus, Ohio in 1969. During 2009,
Wendy’s opened 10 new restaurants and closed 13 generally underperforming
restaurants. In addition, Wendy’s sold 12 Company-owned restaurants
to its franchisees. During 2009, Wendy’s franchisees opened 53 new restaurants
and closed 68 generally underperforming restaurants. In addition, 71
franchised restaurants were closed in Japan at year-end upon the expiration of
the related franchise agreement.
The
following table sets forth the number of Wendy’s restaurants at the beginning
and end of each year from 2007 to 2009:
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2009
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2008
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2007
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Restaurants
open at beginning of period
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6,630
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6,645
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6,673
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Restaurants
opened during period
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63
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97
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92
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Restaurants
closed during period
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(152)
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(112)
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(120)
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Restaurants
open at end of period
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6,541
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6,630
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6,645
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During the period from January 1,
2007, through January 3, 2010, 252 Wendy’s restaurants were opened and 384
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, 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.
Free-standing Wendy’s restaurants
generally include a pick-up window in addition to a dining room. The
percentage of sales at company-owned Wendy’s restaurants through the pick-up
window was 64.6% and 63.8% in 2009 and 2008, respectively.
Wendy’s strives to maintain quality and
uniformity throughout all restaurants by publishing detailed specifications for
food products, preparation and service, continual in-service training of
employees, restaurant reviews and 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, prior to 2010 Wendy’s arranged for volume
purchases of many food and supply products. Commencing in 2010 the
purchasing function was transferred to a new purchasing co-op as described below
in “Raw Materials and Purchasing.”
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 other
outside parties, including certain distributors to the Arby’s
system. At January 3, 2010, the Bakery supplied 692 restaurants
operated by Wendy’s and 2,476 restaurants operated by franchisees. The Bakery
also manufactures and sells some products to customers in the grocery and other
food service businesses.
See Note
25 of the Financial Statements and Supplementary Data included in Item 8
herein, for financial information attributable to certain geographical areas.
Raw
Materials and Purchasing
As of January 3, 2010, 6 independent
processors (7 total production facilities) supplied all of Wendy’s hamburger in
the United States. In addition, 5 independent processors (9 total
production facilities) supplied all of Wendy’s chicken in the United
States.
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. Suppliers
to the Wendy’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.
During
the 2009 fourth quarter, Wendy’s and its franchisees entered into a purchasing
co-op relationship agreement (the “Co-op Agreement”) to establish a new Wendy’s
purchasing co-op, Quality Supply Chain Co-op, Inc. “QSCC”). QSCC now manages
food and related product purchases and distribution services for the Wendy’s
system in the United States and Canada. Through QSCC, Wendy’s and
Wendy’s franchisees purchase food, proprietary paper and operating supplies
under national contracts with pricing based upon total system
volume.
QSCC’s
supply chain management will facilitate continuity of supply and provide
consolidated purchasing efficiencies while monitoring and seeking to minimize
possible obsolete inventory throughout the North American supply chain. The
system’s purchasing function for 2009 and prior was performed and paid for by
Wendy’s. In order to facilitate the orderly transition of the 2010 purchasing
function for North American operations, Wendy’s transferred certain contracts,
assets and certain Wendy’s purchasing employees to QSCC in the first quarter of
2010. Pursuant to the terms of the Co-op Agreement, Wendy’s is
required to pay $15.5 million to QSCC over an 18 month period in order to
provide funding for start-up costs, operating expenses and cash reserves. Future
operations will be funded by all members of QSCC, including Wendy’s and its
franchisees.
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 2010
to 2019, 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 and
includes well-established competitors such as McDonald’s®, Burger King®, Taco
Bell®, Kentucky Fried Chicken® and Arby’s®. 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 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.
Wendy’s competitive position is
differentiated by a focus on quality, its use of fresh, never frozen ground beef
in the United States and Canada and certain other countries, its unique and
diverse menu, its promotional products, its choice of condiments and the
atmosphere and decor of its restaurants.
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, although the recent decline
in commercial real estate values has somewhat offset those
costs. 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 Wendy’s. 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 high 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.
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
As of
January 3, 2010, Wendy’s had 136 company owned and 235 franchised restaurants in
Canada and 293 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 in the certain countries and U.
S. territories listed under Item 2 of this Form 10-K. In addition, Wendy's has
granted development rights for dual-branded Wendy's and Arby's restaurants in 12
countries in the Middle East and North Africa.
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 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.
Franchisees
who wish to develop Wendy’s restaurants outside the United States and Canada
enter into agreements with Wendy’s that generally provide franchise rights for a
restaurant for an initial term of 10 years or 20 years, depending on the
country, and typically include a 10-year renewal provision, subject to certain
conditions. If the restaurant site is leased by the franchisee, the
term will expire with expiration of the term of the lease, if
shorter. The 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. Generally, the franchisee is required to pay Wendy’s
a
technical
assistance fee, which is typically US$30,000 for each restaurant, and monthly
fees, which are typically equal to 4% of the monthly sales of each
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 in a stated territory
based on a negotiated schedule. In some of the agreements, the
developer pays an upfront development fee that is credited against technical
assistance fees incurred in the future. In certain circumstances,
Wendy’s and the franchisee may sign a master franchise agreement under which the
franchisee has the right to sub-franchise in a stated territory, subject to
certain conditions.
We also evaluate non-franchise
opportunities in international markets and may elect to develop a market through
a joint venture, licensing transaction or other arrangement or we may elect to
open company-owned restaurants in a market.
Franchised
Restaurants
As of January 3, 2010, Wendy’s
franchisees operated 5,150 Wendy’s restaurants in 49 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 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, or enter into guarantees of
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 guarantee obligations.
See Note 5 and Note 21 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 Marketing
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 24 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.
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.
As of
January 3, 2010, there were 1,169 company-owned Arby’s restaurants and 2,549
Arby’s restaurants owned by 470 franchisees. Of the 2,549
franchisee-owned restaurants, 2,427 operated within the United States and 122
operated outside the United States, principally in Canada. See “Item
2. Properties” for a listing of the number of Company-owned and franchised
locations in the United States and in foreign countries.
The
revenues from the Arby’s 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.
ARG also
owns the T.J. Cinnamons® concept, which consists of gourmet cinnamon rolls,
gourmet coffees and other related products. As of January 3, 2010,
there were a total of 108 T.J. Cinnamons outlets, 96 of which are multi-branded
with domestic Arby’s restaurants.
Arby’s
Restaurants
Arby’s
opened its first restaurant in Boardman, Ohio in 1964. During 2009, ARG opened 5
new Arby’s restaurants and closed 23 generally underperforming Arby’s
restaurants. In addition, ARG acquired 12 existing Arby’s restaurants
from its franchisees and sold 1 existing Arby’s restaurant to a
franchisee. During 2009, Arby’s franchisees opened 54 new Arby’s
restaurants and closed 74 generally underperforming Arby’s
restaurants. In addition, during 2009, Arby’s franchisees closed 36
T.J. Cinnamons outlets located in Arby’s units.
The
following table sets forth the number of Arby’s restaurants at the beginning and
end of each year from 2007 to 2009:
|
2009
|
|
2008
|
|
2007
|
Restaurants
open at beginning of period
|
3,756
|
|
3,688
|
|
3,585
|
Restaurants
opened during period
|
59
|
|
127
|
|
148
|
Restaurants
closed during period
|
(97)
|
|
(59)
|
|
(45)
|
Restaurants
open at end of period
|
3,718
|
|
3,756
|
|
3,688
|
During the period from January 1, 2007,
through January 3, 2010, 334 Arby’s restaurants were opened and 201 generally
underperforming Arby’s restaurants were closed.
Operations
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. In 2007, Arby's added Toasted Subs to its sandwich
selections, which was Arby’s largest menu expansion since the 2001 introduction
of its Market Fresh line. In 2009, Arby’s launched its new line of
Roastburger™ sandwiches which are Arby’s roast beef sandwiches dressed with
traditional hamburger toppings.
Free-standing
Arby’s restaurants generally include a pick-up window in addition to a dining
room. The percentage of sales at company-owned Arby’s restaurants
through the pick-up window was 57.2% and 57.7% in 2009 and 2008,
respectively.
Generally,
ARG does not sell food or supplies to Arby’s franchisees.
See Note 25 of the Financial Statements
and Supplementary Data included in Item 8 herein, for financial information
attributable to certain geographical areas.
Raw
Materials and Purchasing
As of
January 3, 2010, 3 independent meat processors (5 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.
Arby’s and its franchisees have not
experienced any material shortages of food, equipment, fixtures or other
products that are necessary to maintain restaurant operations. Arby’s
anticipates no such shortages of products and believes that alternate suppliers
are available.
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 USDA and 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 it considers to be material to its restaurant business,
including Arby’s®, Arby’s Market Fresh®, Market Fresh®, Horsey Sauce®,
Sidekickers® and Roastburger®. ARG believes that these and other
related marks are of material importance to its business. Domestic
trademarks and service marks expire at various times from 2010 to 2020, while
international trademarks and service marks have various durations of 10 to 15
years. ARG generally intends to renew trademarks and service marks that are
scheduled to expire.
Seasonality
Arby’s
restaurant operations are not significantly impacted by
seasonality. However, Arby’s restaurant revenues are somewhat lower
in the 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, although the recent decline
in commercial real estate values has somewhat offset those
costs. 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 Arby’s. 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 high 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.
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
Arby’s
has from time to time acquired the interests of and sold Arby’s restaurants to
franchisees, and it is anticipated that the company may have opportunities for
such transactions in the future. Arby’s will continue to sell and acquire
restaurants in the future where prudent.
International
Operations
As
of January 3, 2010, Arby’s had 122 franchised restaurants in Canada and 3 other
countries. Arby’s is evaluating further expansion into other
international markets. Arby’s has granted development rights in
Canada. In addition, Arby's has granted development rights for
dual-branded Wendy's and Arby's restaurants in 12 countries in the Middle East
and North Africa.
Our market entry strategy and terms for
the development and operation of Arby’s restaurants in markets outside of the
United States and Canada vary depending upon market conditions.
Franchised
Restaurants
As of
January 3, 2010, ARG’s franchisees operated 2,549 Arby’s restaurants in 47
states, Canada and 3 other countries.
ARG
offers franchises for the development of both single and multiple “traditional”
and “non-traditional” restaurant locations. The initial term of the
typical “traditional” franchise agreement is 20 years. 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 6.2%,
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.
ARG
currently does not offer any financing arrangements to franchisees seeking to
build new franchised units.
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 Incentive (“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, the Arby’s U.S. Conversion Incentive (“CI”) program was
introduced. The CI program applies to freestanding properties, and calls
for an initial $13,500 franchise fee for a new franchisee’s first franchised
unit, $1,000 for each subsequent unit, $1,000 for each existing franchisee’s
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
royalty rates of less than 4% are still in effect under certain older franchise
agreements, the average royalty rate paid by U.S. ARG franchisees was
approximately 3.6% in each of 2009, 2008 and 2007.
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 4, 2010 and through March 31, 2010, ARG and most domestic Arby’s
franchisees must pay 1.2% of sales as dues to AFA. As of April 1,
2010 and for the remainder of 2010, the AFA Board has approved a dues increase
based on a tiered rate structure for the payment of the advertising and
marketing service fee ranging between 1.4% and 3.6% of sales. ARG’s
advertising and marketing service fee percentage similarly calculated will be
approximately 2.4% as of April 1, 2010. In addition, ARG has agreed
to partially subsidize the top two rate tiers in 2010 thereby decreasing
franchisees’ effective advertising and marketing service fee
percentages. It is estimated that this subsidy will require payments
by ARG of approximately $4.2 million to AFA for 2010. Domestic
franchisee participants in the SMI program pay an extra 1% premium on the
advertising and marketing service fee (2.2% total through March 31, 2010 and
based on the tiered rate structure, an extra 1.0% on the advertising and
marketing service fee through December 31, 2010) of sales up to a maximum of 3%
as AFA dues for the first 36 months of operation; their AFA dues then revert to
the standard advertising and marketing service fee rate without the 1%
premium.
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 2009, as required under
the Management Agreement. 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 22 of the Financial Statements and Supplementary
Data included in Item 8 herein, for further information on 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 sales of
their Arby’s restaurants, for local advertising; however, with the new AFA
tiered rate structure discussed above, any AFA dues paid above 1.2% will be
credited against the local advertising spend requirements. The amount
of expenditures for local advertising 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 5% of 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 ARG’s 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 matters in which we are involved will have
a material adverse effect on our consolidated financial position or results of
operations.
We are
involved in 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 $6.3 million as of January 3,
2010. 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
January 3, 2010, Wendy’s/Arby’s and its subsidiaries had approximately 67,500
employees, including approximately 9,200 salaried employees and approximately
58,300 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 2010, 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:
|
·
|
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.
|
In
particular, our ability to realize the targeted margin improvements at
company-owned Wendy’s restaurants is subject to a number of risks, including
general economic conditions, increases in food and supply costs, increased labor
costs and other factors outside of our control.
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 or financial condition. 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 subsidiary-level 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, including the Wendy’s/Arby’s Restaurants, LLC
(“Wendy’s/Arby’s Restaurants”) credit facilities and the indenture governing the
Wendy’s/Arby’s Restaurants Senior Notes, which are described below in this Item
1A.
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 (such
agreement, as amended, the “Trian Agreement”) with Messrs. Peltz and May and
several of their affiliates (the “Covered Persons”) 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 one of 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 (with respect to
clauses (ii) and (iii) of the preceding sentence), 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 in part 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 an 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
certificate of incorporation contains certain anti-takeover provisions and
permits our board of directors to issue preferred stock without stockholder
approval and limits our ability to raise capital from affiliates.
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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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
January 3, 2010, 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 allowance for
doubtful accounts 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. During periods of declining sales and
profitability of franchisees, such as are currently being experienced by a
significant number of Arby’s franchisees and some Wendy’s franchisees, the
incidence of franchisee defaults for these lease payments increases and we are
then required to make those payments and seek recourse against the franchisee or
agree to repayment terms. 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. Further, we may decide from time to time to
acquire restaurants from franchisees that experience significant financial
hardship, which may reduce our cash and equivalents and/or increase our notes
receivable from franchisees.
Each brand may be unable to manage
effectively the acquisition and disposition of restaurants, which could
adversely affect our business and financial results.
Each
brand acquires restaurants from franchisees and in some cases “re-franchises”
these restaurants by selling them to new or existing franchisees. The
success of these transactions 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 of restaurants effectively, its business
and financial results could be adversely affected.
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 the requirement to spend at least the
specified minimum amounts. ARG’s lack of control over advertising
could hurt sales and the Arby’s brand.
Neither
Wendy’s nor ARG exercises ultimate control over purchasing for their respective
restaurant system, which could harm sales and the brand.
Although
Wendy’s and ARG ensure that all suppliers to their respective systems meet
quality control standards, each brand’s franchisees control the purchasing of
food, proprietary paper, equipment and other operating supplies from such
suppliers through purchasing co-ops controlled by each brand’s
franchisees. The co-ops negotiate national contracts for such food,
equipment and supplies. Wendy’s is entitled to appoint two
representatives on the board of directors of QSCC and participate in QSCC
through its company-owned restaurants, but otherwise does not control the
decisions and activities of QSCC except to ensure that all suppliers satisfy
Wendy’s quality control standards. ARG is entitled to appoint one
representative on the board of directors of ARCOP and participates 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 either co-op does not properly
estimate the product needs of its respective 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 Wendy’s or ARG or the
financial condition of each system’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 high
unemployment rates and 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 have entered into interest rate swaps and other derivative contracts as
described in Note 9 to the Consolidated Financial Statements included in Item 8
herein, and we may enter into additional swaps in the future. 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. 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
January 3, 2010, Wendy’s leased or owned the land and/or the building for 1,391
Wendy’s restaurants and ARG leased or owned the land and/or the building for
1,169 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. In addition, 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.”
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 our 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,
including class action lawsuits related to these matters. 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 (which commenced 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
January 3, 2010, we and our franchisees operated Wendy’s or Arby’s restaurants
in 50 states and 21 foreign countries. As of January 3, 2010 as
detailed in “Item 2. Properties”, the 7 leading states by number of operating
units were: Ohio, Florida, Texas, Michigan, Georgia, Pennsylvania and
California. 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 the amended and restated Arby’s
Credit Agreement entered into as of March 11, 2009 by Wendy’s and its
subsidiaries and ARG and its subsidiaries (collectively, the “Borrowers”), as
amended on June 10, 2009 (as so amended, the “Credit Agreement”), substantially
all of the assets of the Borrowers (other than real property) are pledged as
collateral security. The 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 8 of the Financial Statements
and Supplementary Data included in Item 8 herein, for further information
regarding the Credit Agreement.
As
a result of the Senior Notes issued by Wendy’s/Arby’s Restaurants on June 23,
2009, we and our subsidiaries have a significant amount of debt outstanding.
Such indebtedness, along with the other contractual commitments of our
subsidiaries, could adversely affect our business, financial condition and
results of operations, as well as the ability of certain of our subsidiaries to
meet payment obligations under the Senior Notes and other debt.
As a result of the Senior Notes issued
by Wendy’s/Arby’s Restaurants on June 23, 2009, certain of our subsidiaries have
a significant amount of debt and debt service requirements. As of January 3,
2010, on a consolidated basis, there was approximately $1.5 billion of
outstanding debt.
This
level of debt could have significant consequences on our future operations,
including:
|
·
|
making
it more difficult to meet payment and other obligations under the Senior
Notes and other outstanding debt;
|
|
·
|
resulting
in an event of default if our subsidiaries fail to comply with the
financial and other restrictive covenants contained in debt agreements,
which event of default could result in all of our subsidiaries’ debt
becoming immediately due and
payable;
|
|
·
|
reducing
the availability of our cash flow to fund working capital, capital
expenditures, acquisitions and other general corporate purposes, and
limiting our ability to obtain additional financing for these
purposes;
|
|
·
|
subjecting
us to the risk of increased sensitivity to interest rate increases on our
indebtedness with variable interest rates, including borrowings under the
Credit Agreement;
|
|
·
|
limiting
our flexibility in planning for, or reacting to, and increasing our
vulnerability to, changes in our business, the industry in which we
operate and the general economy;
and
|
|
·
|
placing
us at a competitive disadvantage compared to our competitors that are less
leveraged.
|
In addition, certain of our
subsidiaries also have significant contractual requirements for the purchase of
soft drinks. Wendy’s has also provided loan guarantees to various lenders on
behalf of franchisees entering into pooled debt facility arrangements for new
store development and equipment financing. Certain subsidiaries also guarantee
or are contingently liable for certain leases of their respective franchisees
for which they have been indemnified. In addition, certain subsidiaries also
guarantee or are contingently liable for certain leases of their respective
franchisees for which they have not been indemnified. These commitments could
have an adverse effect on our liquidity and ability of our subsidiaries to meet
payment obligations under the Senior Notes and other debt.
Any of the above-listed factors could
have an adverse effect on our business, financial condition and results of
operations and the ability of our subsidiaries to meet their payment obligations
under the Senior Notes and other debt.
The ability to meet payment and other
obligations under the debt instruments of our subsidiaries depends on their
ability to generate significant cash flow in the future. This, to some extent,
is subject to general economic, financial, competitive, legislative and
regulatory factors as well as other factors that are beyond our control. We
cannot assure you that our business will generate cash flow from operations, or
that future borrowings will be available to us under existing or any future
credit facilities or otherwise, in an amount sufficient to enable our
subsidiaries to meet their payment obligations under the Senior Notes and other
debt and to fund other liquidity needs. If our subsidiaries are not able to
generate sufficient cash flow to service their debt obligations, they may need
to refinance or restructure debt, including the Senior Notes, sell assets,
reduce or delay capital investments, or seek to raise additional capital. If our
subsidiaries are unable to implement one or more of these alternatives, they may
not be able to meet payment obligations under the Senior Notes and other debt
and other obligations.
Despite
our current consolidated indebtedness levels, we and our subsidiaries may still
be able to incur substantially more debt. This could exacerbate further the
risks associated with our substantial leverage.
We and our subsidiaries may be able to
incur substantial additional indebtedness, including additional
secured indebtedness, in the future. The terms of the Senior Notes
indenture and the Credit Agreement restrict, but do not completely prohibit, us
or our subsidiaries from doing so. In addition, the Senior Notes indenture
allows Wendy’s/Arby’s Restaurants to issue additional Senior Notes under certain
circumstances, which will also be guaranteed by the guarantors of the Senior
Notes. The indenture also allows Wendy’s/Arby’s Restaurants to incur certain
secured debt and allows our foreign subsidiaries to incur additional debt, which
would be effectively senior to the Senior Notes. In addition, the indenture does
not prevent Wendy’s/Arby’s Restaurants from incurring other liabilities that do
not constitute indebtedness. If new debt or other liabilities are added to our
current consolidated debt levels, the related risks that we now face could
intensify.
The
current decline in the global economy and credit crisis may significantly
inhibit our ability to reduce and refinance our subsidiaries’ current
indebtedness.
As of January 3, 2010, within 37 months
our subsidiaries had approximately $251.5 million of indebtedness that is due
under the Credit Agreement and $200.0 million of indebtedness due under the
outstanding Wendy’s 6.25% senior notes due 2011. Depending on current and
expected cash flows, our subsidiaries may need to refinance a significant
portion of this indebtedness. During the third quarter of 2008, the global
credit markets suffered a significant contraction, including the failure of some
large financial institutions. This resulted in a significant decline in the
credit markets and the overall availability of credit. Market disruptions, such
as those experienced in 2008 and 2009, as well as our subsidiaries’ significant
debt levels, may increase the cost of borrowing or adversely affect the ability
to refinance the obligations of our subsidiaries as they become due. If we are
unable to refinance our subsidiaries’ indebtedness or access additional credit,
or if short-term or long-term borrowing costs of our subsidiaries dramatically
increase, their ability to finance current operations and meet their short-term
and long-term obligations could be adversely affected.
To
service debt and meet its other cash needs, Wendy’s/Arby’s Restaurants will
require a significant amount of cash, which may not be available to
it.
The ability of Wendy’s/Arby’s
Restaurants to make payments on, or repay or refinance, its debt, including the
Senior Notes, and to fund planned capital expenditures, dividends and other cash
needs will depend largely upon its future operating performance. Future
performance, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. In addition, the ability of Wendy’s/Arby’s Restaurants to borrow funds
in the future to make payments on its debt will depend on the satisfaction of
the covenants in its credit facilities and other debt agreements, including the
indenture governing the Senior Notes, the Credit Agreement and other agreements
Wendy’s/Arby’s Restaurants may enter into in the future. Specifically,
Wendy’s/Arby’s Restaurants will need to maintain specified financial ratios and
satisfy financial condition tests. There is no assurance that the Wendy’s/Arby’s
Restaurants business will generate sufficient cash flow from operations or that
future borrowings will be available under its credit facilities or from other
sources in an amount sufficient to enable Wendy’s/Arby’s Restaurants to pay its
debt, including the Senior Notes, or to fund our dividend and other liquidity
needs.
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
plans to expand its breakfast initiative test in certain markets in
2010. The breakfast daypart remains competitive and markets may prove
difficult to penetrate.
The roll out of breakfast at Wendy’s
has been accompanied by challenging competitive conditions, varied consumer
tastes and discretionary spending patterns that differ from lunch, snack, dinner
and late night hours. In addition, breakfast sales can cannibalize sales during
other parts of the day and may have negative implications on food and labor
costs and restaurant margins. Wendy's plans to expand its breakfast initiative
test in four additional markets in 2010. Wendy’s
will need to reinvest royalties earned and other amounts to build breakfast
brand awareness with advertising and promotional activities. Capital investments
will also be required at company-owned restaurants. As a result, breakfast sales
and resulting profits may take longer than expected to reach targeted
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 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. No additional allowance was recorded in 2009. 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.
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 principal office facilities as of
January 3, 2010:
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.
|
|
**
A management
company formed by Messrs. 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 subleases
approximately 26,600 square feet of this space from
us.
|
|
***
QSCC, the independent Wendy’s purchasing cooperative in which Wendy’s has
non-controlling representation on the board of directors, leases
approximately 9,300 square feet of this space from
Wendy’s. This lease was entered into effective January 4,
2010.
|
At
January 3, 2010, Wendy’s and its franchisees operated 6,541 Wendy’s
restaurants. Of the 1,391 company-owned Wendy’s restaurants, Wendy’s
owned the land and building for 634 restaurants, owned the building and held
long-term land leases for 471 restaurants and held leases covering land and
building for 286 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, 220
Wendy’s restaurant locations which were leased or subleased to franchisees.
Surplus land and buildings are generally held for sale and are not material to
our financial condition or results of operations.
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 January 3, 2010 the Bakery employed approximately 360 people at
the two facilities that had a combined size of approximately 205,000 square
feet.
As of
January 3, 2010, Arby’s and its franchisees operated 3,718 Arby’s
restaurants. Of the 1,169 company-owned Arby’s restaurants, ARG owned
the land and/or the buildings with respect to 131 of these restaurants and
leased or subleased the remainder. As of January 3, 2010, ARG also
owned 15 and leased 84 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 January 3, 2010 is set forth below.
|
Wendy’s
|
Arby’s
|
State
|
Company
|
Franchise
|
Company
|
Franchise
|
Alabama
|
—
|
96
|
70
|
33
|
Alaska
|
—
|
7
|
—
|
9
|
Arizona
|
46
|
54
|
—
|
83
|
Arkansas
|
—
|
64
|
—
|
44
|
California
|
57
|
217
|
41
|
87
|
Colorado
|
47
|
80
|
—
|
63
|
Connecticut
|
5
|
45
|
12
|
2
|
Delaware
|
—
|
15
|
—
|
19
|
Florida
|
187
|
299
|
92
|
86
|
Georgia
|
55
|
239
|
89
|
59
|
Hawaii
|
7
|
__
|
—
|
8
|
Idaho
|
—
|
30
|
—
|
22
|
Illinois
|
97
|
92
|
5
|
139
|
Indiana
|
5
|
172
|
99
|
83
|
Iowa
|
—
|
45
|
—
|
54
|
Kansas
|
11
|
64
|
—
|
51
|
Kentucky
|
3
|
140
|
48
|
85
|
Louisiana
|
55
|
73
|
—
|
30
|
Maine
|
5
|
15
|
—
|
8
|
Maryland
|
—
|
114
|
17
|
31
|
Massachusetts
|
71
|
22
|
—
|
5
|
Michigan
|
21
|
250
|
109
|
80
|
Minnesota
|
—
|
68
|
84
|
3
|
Mississippi
|
8
|
87
|
3
|
22
|
Missouri
|
29
|
56
|
4
|
78
|
Montana
|
—
|
17
|
—
|
18
|
Nebraska
|
—
|
34
|
—
|
50
|
Nevada
|
—
|
46
|
—
|
31
|
New
Hampshire
|
4
|
21
|
—
|
—
|
New
Jersey
|
21
|
118
|
17
|
10
|
New
Mexico
|
—
|
38
|
—
|
30
|
New
York
|
65
|
155
|
—
|
89
|
North
Carolina
|
40
|
215
|
60
|
79
|
North
Dakota
|
—
|
9
|
—
|
14
|
Ohio
|
77
|
350
|
104
|
182
|
Oklahoma
|
—
|
38
|
—
|
95
|
Oregon
|
19
|
33
|
21
|
16
|
Pennsylvania
|
79
|
179
|
91
|
60
|
Rhode
Island
|
9
|
11
|
—
|
—
|
South
Carolina
|
—
|
131
|
13
|
61
|
South
Dakota
|
—
|
9
|
—
|
15
|
Tennessee
|
—
|
180
|
53
|
60
|
Texas
|
73
|
322
|
72
|
109
|
Utah
|
57
|
28
|
33
|
40
|
Vermont
|
—
|
5
|
—
|
—
|
Virginia
|
53
|
162
|
2
|
107
|
Washington
|
27
|
45
|
24
|
41
|
West
Virginia
|
22
|
51
|
1
|
35
|
Wisconsin
|
—
|
63
|
4
|
86
|
Wyoming
|
—
|
14
|
1
|
15
|
District
of Columbia
|
—
|
4
|
—
|
—
|
Domestic
Subtotal
|
1,255
|
4,622
|
1,169
|
2,427
|
|
Wendy’s
|
Arby’s
|
Country/Territory
|
Company
|
Franchise
|
Company
|
Franchise
|
Aruba
|
—
|
3
|
—
|
—
|
Bahamas
|
—
|
8
|
—
|
—
|
Canada
|
136
|
235
|
—
|
112
|
Cayman
Islands
|
—
|
3
|
—
|
—
|
Costa
Rica
|
—
|
5
|
—
|
—
|
Dominican
Republic
|
—
|
4
|
—
|
—
|
El
Salvador
|
—
|
14
|
—
|
—
|
Guam
|
—
|
2
|
—
|
—
|
Guatemala
|
—
|
7
|
—
|
—
|
Honduras
|
—
|
29
|
—
|
—
|
Indonesia
|
—
|
25
|
—
|
—
|
Jamaica
|
—
|
2
|
—
|
—
|
Malaysia
|
—
|
8
|
—
|
—
|
Mexico
|
—
|
24
|
—
|
—
|
New
Zealand
|
—
|
15
|
—
|
—
|
Panama
|
—
|
5
|
—
|
—
|
Philippines
|
—
|
30
|
—
|
—
|
Puerto
Rico
|
—
|
66
|
—
|
—
|
Singapore
|
—
|
1
|
—
|
—
|
Qatar
|
—
|
—
|
—
|
1
|
Turkey
|
—
|
—
|
—
|
8
|
United
Arab Emirates
|
—
|
—
|
—
|
1
|
Venezuela
|
—
|
40
|
—
|
—
|
U.
S. Virgin Islands
|
—
|
2
|
—
|
—
|
International
Subtotal
|
136
|
528
|
—
|
122
|
Grand
Total
|
1,391
|
5,150
|
1,169
|
2,549
|
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 (which commenced in 2008) to bring the
restaurants into compliance under the settlement agreement, in addition to
paying certain legal fees and expenses.
In
addition to the legal matter described above, 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 $6.3 million as of January 3,
2010. 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. (Removed and
Reserved)
PART
II
Item 5. Market for
Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
The
principal market for our 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 Common Stock and Class B Common Stock was the New York Stock
Exchange (symbols: TRY and TRY.B, respectively). Immediately prior to
the Wendy’s Merger, each share of our Class B common stock was converted into
Class A common stock on a one for one basis (the “Conversion”). In
connection with the May 28, 2009 amendment and restatement of our Certificate of
Incorporation, our former Class A common stock is now referred to as “Common
Stock.” The high and low market prices for our Common Stock and former Class B
Common Stock, as reported in the consolidated transaction reporting system, are
set forth below:
|
|
Market
Price
|
|
Fiscal
Quarters
|
|
Common Stock
|
|
|
Class B
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter ended March 29
|
|
$ |
5.80 |
|
|
$ |
3.86 |
|
|
|
N/A |
|
|
|
N/A |
|
Second
Quarter ended June 28
|
|
|
5.78 |
|
|
|
3.55 |
|
|
|
N/A |
|
|
|
N/A |
|
Third
Quarter ended September 27
|
|
|
5.54 |
|
|
|
3.80 |
|
|
|
N/A |
|
|
|
N/A |
|
Fourth
Quarter ended January 3
|
|
|
5.04 |
|
|
|
3.95 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
(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 Common Stock. The prices for the fourth quarter
of 2008 are for the September 29 trading day only.
Our 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 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
Common Stock and Class B Common Stock differed. In accordance with
the Certificate of Designation for our Class B Common Stock, and subsequent
resolutions adopted by our board of directors, 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
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 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 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 Common Stock in any remaining assets of the Company.
We have
no class of equity securities currently issued and outstanding except for our
Common Stock. However, we are currently authorized to issue up to 100
million shares of preferred stock.
During our 2009 fiscal year, we paid
regular quarterly cash dividends of $0.015 per share of Common
Stock.
During our 2008 fiscal year, we paid
regular quarterly cash dividends of $0.08 and $0.09 per share on our 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
Common Stock 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 Common Stock.
During
the 2010 first quarter, we declared dividends of $0.015 per share to be paid on
March 15, 2010 to shareholders of record as of March 1,
2010. 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 and
cash equivalents on hand, cash flows from Wendy’s and ARG, including loans, cash
dividends, reimbursement by ARG to us in connection with providing certain
management services, and payments by Wendy’s and ARG under tax sharing
agreements. Our cash requirements include, but are not limited to, interest and
principal payments on our indebtedness. Under the terms of the
amended and restated Arby’s 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 (including Wendy’s and ARG) 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 8 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 26, 2010, there were approximately 47,077 holders of record of our
Common 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 2009:
Issuer
Repurchases of Equity Securities
Period
|
|
Total
Number of Shares Purchased
|
|
|
Average
Price Paid per Share
|
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plan
(1)
|
|
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plan
(1)
|
|
September
28, 2009
through
October
25, 2009
|
|
|
--- |
|
|
|
--- |
|
|
|
4,964,150 |
|
|
$ |
2,915,024 |
|
October
26, 2009
through
November
22, 2009
|
|
|
--- |
|
|
|
--- |
|
|
|
479,817 |
|
|
$ |
50,853,347 |
|
November
23, 2009
through
January
3, 2010
|
|
|
--- |
|
|
|
--- |
|
|
|
6,618,400 |
|
|
$ |
46,618,453 |
|
Total
|
|
|
--- |
|
|
|
--- |
|
|
|
12,062,367 |
|
|
$ |
46,618,453 |
|
(1)
|
On
August 4, 2009, our Board of Directors authorized a $50.0 million common
stock repurchase program to remain in effect through January 2, 2011,
which allows us to repurchase up to $50.0 million of our Common Stock when
and if market conditions warrant and to the extent legally permissible.
From that date and through September 27, 2009, we repurchased 4.8 million
shares for an aggregate purchase price of $25.1 million, excluding
commissions of $0.1 million. On November 3, 2009 and December 10, 2009,
our Board of Directors authorized our management to repurchase through
January 2, 2011 up to an additional $50.0 million and $25.0 million,
respectively, of our Common Stock.
|
On
January 27, 2010, our Board of Directors authorized our management, when and if
market conditions warrant and to the extent legally permissible, to repurchase
through January 2, 2011 up to an additional $75.0 million of our Common
Stock.
Item
6. Selected
Financial Data.
|
|
Year Ended
(1) |
|
|
|
January
3, 2010
|
|
|
December
28, 2008 (2)
|
|
|
December
30, 2007(2)
|
|
|
December
31, 2006(2)
|
|
|
January
1, 2006(2)
|
|
(In millions,
except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
3,198.3 |
|
|
$ |
1,662.3 |
|
|
$ |
1,113.4 |
|
|
$ |
1,073.3 |
|
|
$ |
570.8 |
|
Franchise
revenues
|
|
|
382.5 |
|
|
|
160.5 |
|
|
|
87.0 |
|
|
|
82.0 |
|
|
|
91.2 |
|
Asset
management and related fees
|
|
|
- |
|
|
|
- |
|
|
|
63.3 |
|
|
|
88.0 |
|
|
|
65.3 |
|
Revenues
|
|
|
3,580.8 |
|
|
|
1,822.8 |
|
|
|
1,263.7 |
|
|
|
1,243.3 |
|
|
|
727.3 |
|
Operating
profit (loss)
|
|
|
112.0 |
(5) |
|
|
(413.6 |
)
(6) |
|
|
19.9 |
(7) |
|
|
44.6 |
|
|
|
(31.4 |
)
(9) |
Income
(loss) from continuing operations
|
|
|
3.5 |
(5) |
|
|
(482.0 |
)
(6) |
|
|
15.1 |
(7) |
|
|
0.7 |
(8) |
|
|
(49.7 |
)
(9) |
Income
from discontinued operations
|
|
|
1.6 |
|
|
|
2.2 |
|
|
|
1.0 |
|
|
|
- |
|
|
|
3.3 |
|
Net
income (loss)
|
|
|
5.1 |
(5) |
|
|
(479.8 |
)
(6) |
|
|
16.1 |
(7) |
|
|
(10.9 |
)
(8) |
|
|
(55.2 |
)
(9) |
Basic
and diluted income (loss) per share (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
.01 |
|
|
|
(3.06 |
) |
|
|
.15 |
|
|
|
(.13 |
) |
|
|
(.84 |
) |
Class
B common stock
|
|
|
N/A |
|
|
|
(1.26 |
) |
|
|
.17 |
|
|
|
(.13 |
) |
|
|
(.84 |
) |
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
- |
|
|
|
.01 |
|
|
|
.01 |
|
|
|
- |
|
|
|
.05 |
|
Class
B common stock
|
|
|
N/A |
|
|
|
.02 |
|
|
|
.01 |
|
|
|
- |
|
|
|
.05 |
|
Net
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
.01 |
|
|
|
(3.05 |
) |
|
|
.16 |
|
|
|
(.13 |
) |
|
|
(.79 |
) |
Class
B common stock
|
|
|
N/A |
|
|
|
(1.24 |
) |
|
|
.18 |
|
|
|
(.13 |
) |
|
|
(.79 |
) |
Cash
dividends per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
.06 |
|
|
|
.26 |
|
|
|
.32 |
|
|
|
.77 |
|
|
|
.29 |
|
Class
B common stock
|
|
|
N/A |
|
|
|
.26 |
|
|
|
.36 |
|
|
|
.81 |
|
|
|
.33 |
|
Working
capital (deficiency)
|
|
|
403.8 |
|
|
|
(121.7 |
) |
|
|
(36.9 |
) |
|
|
161.2 |
|
|
|
295.6 |
|
Properties
|
|
|
1,619.2 |
|
|
|
1,770.4 |
|
|
|
504.9 |
|
|
|
488.5 |
|
|
|
443.9 |
|
Total
assets
|
|
|
4,975.4 |
|
|
|
4,645.6 |
|
|
|
1,454.6 |
|
|
|
1,560.4 |
|
|
|
2,809.5 |
|
Long-term
debt
|
|
|
1,500.8 |
|
|
|
1,081.2 |
|
|
|
711.5 |
|
|
|
701.9 |
|
|
|
894.5 |
|
Stockholders’
equity
|
|
|
2,336.3 |
|
|
|
2,383.4 |
|
|
|
449.8 |
|
|
|
492.0 |
|
|
|
441.7 |
|
Weighted
average shares outstanding (4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
466.2 |
|
|
|
137.7 |
|
|
|
28.8 |
|
|
|
27.3 |
|
|
|
23.8 |
|
Class
B common stock
|
|
|
N/A |
|
|
|
48.0 |
|
|
|
63.5 |
|
|
|
59.3 |
|
|
|
46.2 |
|
(1) Wendy’s/Arby’s
Group, Inc. and its subsidiaries (the “Company”) reports on a fiscal year
consisting of 53 or 52 weeks ending on the Sunday closest to December
31. Except for the 2009 fiscal year which contained 53 weeks, each of
the Company’s fiscal years presented above contained 52 weeks. All
references to years relate to fiscal years rather than calendar years. 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. Immediately prior to the Wendy’s Merger, each
share of our Class B common stock was converted into Class A common stock on a
one for one basis. In connection with the May 28, 2009 amendment and
restatement of our Certificate of Incorporation, our former Class A common stock
is now referred to as “Common Stock.” 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.
(2) Selected
financial data reflects the changes related to the adoption of the following
accounting standards:
(a) As of
January 1, 2007, we utilized 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. We utilized 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. However, there was a net reduction of $2.3 in
stockholders’ equity as of January 1, 2007.
|
(b)
As of January 1, 2007, the Company accounted for scheduled major aircraft
maintenance overhauls in accordance with the direct expensing method under
which the actual cost of such overhauls was 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. The Company credited
$0.6 and $0.7 to operating profit and $0.4 and $0.5 to income from
continuing operations and net income for 2006 and 2005,
respectively.
|
(c) As of
January 2, 2006, the Company measured 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 common stock 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. There was no effect from the adoption of this new accounting
methodology on the financial statements for all periods presented prior to the
accounting change.
(d) As of
December 29, 2008, the Company adopted new accounting guidance related to
non-controlling interests (formerly referred to as minority
interests). This adoption resulted in the retrospective
reclassification of minority interests from its former presentation as a
liability to “Stockholder’s equity.” The reclassifications were $0.l, $0.9,
$14.2 and $43.4 for 2008, 2007, 2006 and 2005 respectively. Additionally, in
accordance with the new guidance, the loss from continuing operations in 2006
and 2005 excludes the effect of income attributable to non-controlling interests
of $11.5 and $8.8, respectively. Income attributable to non-controlling
interests in 2008 and 2007 was not material.
(3) For the
purposes of calculating income per share amounts for 2007, net income was
allocated between the shares of the Company’s 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 all years through 2008
was allocated equally between Common Stock and Class B common
stock.
(4) The number of shares used in the
calculation of diluted income per share in 2009 and 2007 consist of the weighted
average common shares outstanding for each class of common stock and potential
shares of common stock reflecting the effect of 483 dilutive stock options and
nonvested restricted shares for 2009 and 129 for the Company’s common stock and
759 for the Company’s Class B common stock for 2007. 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.
(5) Reflects
significant charges recorded in 2009 of $82.1 million charged to operating
profit for impairment of long-lived assets other than goodwill and $50.9 million
charged to income from continuing operations and net income related to these
charges.
(6) Reflects certain significant
charges and credits recorded during 2008 as follows: $460.1 charged to operating
loss consisting of a goodwill impairment for the Arby’s Company-owned restaurant
reporting unit; $484.0 charged to loss from continuing operations and net loss
representing the aforementioned $460.1 charged to operating loss and other than
temporary losses on investments of $112.7 partially offset by $88.8 of income
tax benefit related to the above charges.
(7) 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.
(8) 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.
(9) 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.
Item 7.
|
Management's Discussion and
Analysis of Financial Condition and Results of
Operations.
|
This
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of Wendy’s/Arby’s Group, Inc. (“Wendy’s/Arby’s” and, together with
its subsidiaries, the “Company” or “we”) should be read in conjunction with the
consolidated financial statements and the related notes that appear elsewhere
within this report. 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.
On
September 29, 2008, we completed the merger (the “Wendy’s Merger”) with Wendy’s
International, Inc. (“Wendy’s”) described below under “Introduction and
Executive Overview – Merger with Wendy’s International, Inc.”, and our corporate
name Triarc Companies, Inc., (“Triarc”), was changed to Wendy’s/Arby’s Group,
Inc. The references to the “Company” or “we” for periods prior to September 29,
2008 refer to Triarc and its subsidiaries. Because the Wendy’s Merger
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 our 2008
results. The results of operations discussed below for 2008 and 2007
will not be indicative of future results due to the consummation of the Wendy’s
Merger as well as the 2007 sale of our interest in Deerfield & Company LLC
(“Deerfield”) discussed below.
Introduction
and Executive Overview
Our
Business
Wendy’s/Arby’s
is the parent company of its wholly-owned subsidiary holding company
Wendy’s/Arby’s Restaurants, LLC (“Wendy’s/Arby’s Restaurants”). Wendy’s/Arby’s
Restaurants is the parent company of Wendy’s International, Inc. and Arby’s
Restaurant Group, Inc. (“ARG” or “Arby’s”), which are the owners and franchisors
of the Wendy’s® and Arby’s® restaurant systems, respectively. We currently
manage and internally report our operations as two business segments: the
operation and franchising of Wendy’s restaurants, including its wholesale bakery
operations, and the operation and franchising of Arby’s restaurants. As of
January 3, 2010, the Wendy’s restaurant system was comprised of 6,541
restaurants, of which 1,391 were owned and operated by the Company. As of
January 3, 2010, the Arby’s restaurant system was comprised of 3,718
restaurants, of which 1,169 were owned and operated by the Company. All 2,560
Wendy’s and Arby’s Company-owned restaurants are located principally in the
United States and to a lesser extent in Canada (the “North America
Restaurants”). 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 (the “Deerfield Sale”) to Deerfield Capital Corp. (“DFR”).
Restaurant
business revenues for 2009 include: (1) $3,086.5 million of sales from
Company-owned restaurants, (2) $111.8 million from the sale of bakery items and
kid’s meal promotion items to our franchisees and others, (3) $353.1 million
from royalty income from franchisees and (4) $29.4 million of other franchise
related revenue. Our revenues increased significantly in 2009 and 2008 due to
the Wendy’s Merger. All of our Wendy’s and substantially all of our
Arby’s royalty agreements provide for royalties of 4.0% of franchise revenues
for the year ended January 3, 2010. 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”).
Our
restaurant businesses have recently experienced trends in the following
areas:
Revenues
|
·
|
Industry-wide
declines in same-store sales of all segments of the restaurant industry,
including quick service restaurants
(“QSR”);
|
|
·
|
Continued
lack of general consumer confidence in the economy and the effect of
decreases in many consumers’ discretionary income caused by factors such
as (1) volatility in the financial markets and recessionary economic
conditions, including high unemployment levels and (2) a significant
decline in the real estate market, although that market has shown some
improvement in recent months;
|
|
·
|
Continued
and increasingly aggressive price competition in the QSR industry, as
evidenced by (1) value menus, which offer lower prices on some menu items,
(2) the use of coupons and other price discounting and (3) combination
meal concepts, which offer a complete meal at an aggregate price lower
than the price of individual food and beverage
items;
|
|
·
|
Competitive
pressures due to extended hours of operation by many QSR competitors,
including breakfast and late night
hours;
|
|
·
|
Competitive
pressures from operators outside the QSR industry, such as the deli
sections and in-store cafes of major grocery and other retail store
chains, convenience stores and casual dining outlets offering take-out
food;
|
|
·
|
Increased
availability to consumers of product choices, including (1) healthy
products driven by a greater consumer awareness of nutritional issues, (2)
beverage programs which offer a wider selection of premium non-carbonated
beverages, including coffee and tea products, and (3) sandwiches with
perceived higher levels of freshness, quality and customization;
and
|
|
·
|
Competitive
pressures from an increasing number of franchise opportunities seeking to
attract qualified franchisees.
|
Cost of
Sales
|
·
|
Decreasing
commodity prices which have reduced our food costs in the second half of
2009;
|
|
·
|
Federal,
state and local legislative activity, such as minimum wage increases and
mandated health and welfare benefits which is expected to continue to
increase wages and related fringe benefits, including health care and
other insurance costs; and
|
|
·
|
Legal
or regulatory activity related to nutritional content or menu labeling
which results in increased operating
costs.
|
|
·
|
A
significant portion of both our Wendy’s and Arby’s restaurants are
franchised and, as a result, we receive revenue in the form of royalties
(which are generally based on a percentage of sales at franchised
restaurants), rent and other fees from franchisees. Arby’s franchisee
related accounts receivable and estimated reserves for uncollectibility
have increased significantly, and may continue to increase, as a result of
the deteriorating financial condition of some of our franchisees. The
financial condition of a number of Arby’s franchisees resulted in a net
decrease in the number of franchised restaurants in 2009 and also affects
franchisees’ ability to make required contributions to national and local
advertising programs;
|
|
·
|
Weakness
in the overall credit markets, including availability in the lending
markets typically used to finance new unit development and remodels.
Tightened credit conditions and economic pressures have negatively
impacted franchisees, including the ability of some franchisees to meet
their 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.
Business
Highlights
We
believe there are significant opportunities to grow our business, strengthen our
competitive position and enhance our profitability through the execution of the
following strategies:
|
·
|
Grow
same-store sales at Wendy’s and Arby’s by introducing innovative new menu
items, enhancing the customer experience with operational excellence, and
improving affordability with everyday value menu
items;
|
|
·
|
Continue
to improve Wendy’s Company-owned restaurant
margins;
|
|
·
|
Expand
our restaurant base in North America and accelerate our program to remodel
restaurants;
|
|
·
|
Invest
in our international business to grow substantially in key markets outside
of North America; and
|
|
·
|
Possibly
acquire other restaurant companies.
|
Key
Business Measures
We track
our results of operations and manage our business using the following key
business measures:
We report
Arby’s North America Restaurants same-store sales commencing after a store has
been open for fifteen continuous months. Wendy’s North America Restaurants
same-store sales are reported after a store has been open for at least fifteen
continuous months as of the beginning of the fiscal year. These methodologies
are consistent with the metrics used by our management for internal reporting
and analysis. Same-store sales exclude the impact of currency
translation.
We define
restaurant margin as sales from Company-owned restaurants (excluding sales of
bakery items and kid’s meal promotion items to franchisees) less cost of sales
(excluding costs of bakery items and kid’s meal promotion items sold to
franchisees), divided by sales from Company-owned restaurants (excluding sales
of bakery items and kid’s meal promotion items sold to franchisees). Restaurant
margin is influenced by factors such as restaurant openings and closures,
price
increases,
the effectiveness of our advertising and marketing initiatives, featured
products, product mix, the level of our fixed and semi-variable costs, and
fluctuations in food and labor costs.
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 4.25 shares of Wendy’s/Arby’s Class A
Common Stock for each share of Wendy’s common stock owned. Immediately prior to
the Wendy’s Merger, each share of our Class B Common Stock was converted into
Class A Common Stock on a one for one basis (the “Conversion”). In
connection with the May 28, 2009 amendment and restatement of our Certificate of
Incorporation, our Class A Common Stock is now referred to as “Common
Stock.”
Senior
Notes
On June
23, 2009, Wendy’s/Arby’s Restaurants issued $565.0 million principal amount of
Senior Notes (the “Senior Notes”). The Senior Notes will mature on July 15, 2016
and accrue interest at 10.00% per annum, payable semi-annually on January 15 and
July 15, the first payment of which was made on January 15, 2010. The Senior
Notes were issued at 97.533% of the principal amount, representing a yield to
maturity of 10.50% and resulting in net proceeds paid to us of $551.1 million.
This original $13.9 million discount is being accreted and the related charge
included in “Interest expense” until the Senior Notes mature. The Senior Notes
are fully and unconditionally guaranteed, jointly and severally, on an unsecured
basis by certain direct and indirect domestic subsidiaries of Wendy’s/Arby’s
Restaurants (collectively, the “Guarantors”).
Deerfield
On
December 21, 2007, we completed the Deerfield Sale to DFR 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 owned an
additional 0.2 million common shares in DFR.
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. During the first quarter of 2008, our Board of Directors
approved the distribution of our 9.8 million shares of DFR common stock, which
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 Common Stock and our then
outstanding Class B common stock.
In 2008,
in response to unanticipated credit and liquidity events, DFR announced changes
to its business model and significant losses. Based on these events 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 was impaired. As a result, we recorded an other than
temporary loss which is included in “Other than temporary losses on
investments,” of $68.1 million during the first quarter of 2008. As a result of
the distribution of the DFR common stock, the income tax loss that resulted from
the decline in value of our investment of $68.1 million was not deductible for
income tax purposes and no income tax benefit was recorded related to this
loss.
However,
due to significant financial weakness in the credit markets, 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.”
Related
Party Transactions
Corporate
Restructuring
In 2007,
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 our executive team in Atlanta, Georgia.
Equities
Account
Prior to
2007, we invested $75.0 million in brokerage accounts (the “Equities Account”),
which was managed by a management company (the “Management Company”) formed by
the Former Executives and a director, who is our former Vice Chairman
(collectively
with the Former Executives, the “Principals”). The Equities Account
was invested principally in equity securities, cash equivalents and equity
derivatives of a limited number of publicly-traded companies. In addition, the
Equities Account sold securities short and invested in market put options in
order to lessen the impact of significant market downturns.
In June
2009, we and the Management Company entered into a withdrawal agreement (the
“Withdrawal Agreement”) which provided that we would be permitted to withdraw
all amounts in the Equities Account on an accelerated basis (the “Early
Withdrawal”) effective no later than June 26, 2009. Prior to the Withdrawal
Agreement and as a result of an investment management agreement with the
Management Company, which was terminated on June 26, 2009, we had not been
permitted to withdraw any amounts from the Equities Account until December 31,
2010, although $47.0 million was released from the Equities Account in 2008
subject to an obligation to return that amount to the Equities Account by a
specified date. In consideration for obtaining such Early Withdrawal
right, we agreed to pay the Management Company $5.5 million (the “Withdrawal
Fee”), were not required to return the $47.0 million referred to above and were
no longer obligated to pay investment management and incentive fees to the
Management Company. The Equities Account investments were liquidated in June
2009 for $37.4 million (the “Equities Sale”), of which $31.9 million was
received by us, net of the Withdrawal Fee, and for which we realized a gain of
$2.3 million in 2009, both included in “Investment expense (income),
net.”
Services
Agreement
Wendy’s/Arby’s
and the Management Company entered into a new services agreement (the “New
Services Agreement”) which commenced on July 1, 2009 and will continue until
June 30, 2011, unless sooner terminated. Under the New Services Agreement, the
Management Company will assist us with strategic merger and acquisition
consultation, corporate finance and investment banking services and related
legal matters. Pursuant to the terms of this agreement, we are paying the
Management Company a service fee of $0.25 million per quarter, payable in
advance commencing July 1, 2009. In addition, in the event the Management
Company provides substantial assistance to us in connection with a merger or
acquisition, corporate finance and/or similar transaction that is consummated at
any time during the period commencing on the date the New Services Agreement was
executed and ending six months following the expiration of its term, we will
negotiate a success fee to be paid to the Management Company which is reasonable
and customary for such transactions.
Under a
prior services agreement which commenced on June 30, 2007 and expired on June
30, 2009, (the “Services Agreement”) the Management Company provided a broader
range of professional and strategic services to us in connection with our
corporate restructuring and the transition of all executive management
responsibilities as described above.
We paid
approximately $5.4 million in fees for corporate finance advisory services in
2009 to the Management Company in connection with the issuance of the Senior
Notes.
Liquidation Services
Agreement
On June
10, 2009, Wendy’s/Arby’s and the Management Company entered into a liquidation
services agreement (the “Liquidation Services Agreement”) whereby, the
Management Company will assist us in the sale, liquidation or other disposition
of our cost investments and DFR Notes, (the “Legacy Assets”), which
are not related to the Equities Account. As of the date of the
Liquidation Services Agreement, the Legacy Assets were valued at $36.6 million
(the “Target Amount”). The Liquidation Services Agreement, which
expires June 30, 2011, provides that we will pay the Management Company a fee of
$0.9 million in two installments, which is being recognized over the term of the
agreement and included in “General and administrative.” In addition, in the
event that any or all of the Legacy Assets are sold, liquidated or otherwise
disposed of and the aggregate net proceeds to us are in excess of the Target
Amount, then we will pay the Management Company a success fee equal to 10% of
the aggregate net proceeds in excess of the Target Amount.
Aircraft
Agreements
During
2009, the time share agreements with the Principals and the Management Company
for the use of two of our aircraft expired. One of the aircraft was
sold in 2009 to an unrelated third party.
Wendy’s/Arby’s
and TASCO, LLC (an affiliate of the Management Company) (“TASCO”) entered into
an aircraft lease agreement (the “Aircraft Lease Agreement”) for the other
aircraft that was previously under a time share agreement. The
Aircraft Lease Agreement provides that the Company will lease such corporate
aircraft to TASCO from July 1, 2009 until June 30, 2010. The Aircraft Lease
Agreement provides that TASCO will pay $10,000 per month for such aircraft plus
substantially all operating costs of the aircraft including all costs of fuel,
inspection, servicing and storage, as well as operational and flight crew costs
relating to the operation of the aircraft, and all transit maintenance costs and
other maintenance costs required as a result of TASCO’s usage of the aircraft.
We will continue to be responsible for calendar-based maintenance and any
extraordinary and unscheduled repairs and/or maintenance for the aircraft, as
well as insurance and other costs. The Aircraft Lease Agreement may be
terminated by us without penalty in the event we sell the aircraft to a third
party, subject to a right of first refusal in favor of the Management Company
with respect to such a sale.
Supply Chain Relationship
Agreement
During
the 2009 fourth quarter, Wendy’s and its franchisees entered into a purchasing
co-op relationship agreement (the “Co-op Agreement”) to establish a new Wendy’s
purchasing co-op, Quality Supply Chain Co-op, Inc. (“QSCC”). QSCC now manages
food and related product purchases and distribution services for the Wendy’s
system in the United States and Canada. Through QSCC, Wendy’s and
Wendy’s franchisees purchase food, proprietary paper and operating supplies
under national contracts with pricing based upon total system
volume.
QSCC’s
supply chain management will facilitate continuity of supply and provide
consolidated purchasing efficiencies while monitoring and seeking to minimize
possible obsolete inventory throughout the North American supply chain. The
system’s purchasing function for 2009 and prior was performed and paid for by
Wendy’s. In order to facilitate the orderly transition of the 2010 purchasing
function for North American operations, Wendy’s transferred certain contracts,
assets and certain Wendy’s purchasing employees to QSCC in the first quarter of
2010. Pursuant to the terms of the Co-op Agreement, Wendy’s is
required to pay $15.5 million to QSCC over an 18 month period in order to
provide funding for start-up costs, operating expenses and cash reserves. Future
operations will be funded by all members of QSCC, including Wendy’s and its
franchisees. The required payments by
Wendy’s under the Co-op Agreement were expensed in the fourth quarter of 2009
and included in “General and administrative.” Effective January 4,
2010, the QSCC will be leasing 9,333 square feet of office space from Wendy’s
for a two year period for an average annual rental of $0.1 million with five
one-year renewal options.
ARCOP,
Inc., a not-for-profit purchasing cooperative, negotiates contracts with
approved suppliers on behalf of ARG and Arby’s franchisees and operates under a
previously established agreement similar to the Wendy’s Co-op
Agreement.
Revolving credit
facilities
On
December 31, 2009, AFA Service Corporation (“AFA”), an independently controlled
advertising cooperative for the Arby’s restaurant system in which we have voting
interests of substantially less than 50%, entered into a revolving loan
agreement with ARG. This agreement, which provided for ARG to make
revolving loans of up to $5.5 million to AFA, was amended on February 25, 2010
to provide for revolving loans up to $14.5 million. Under the terms of
this agreement; outstanding amounts are due through April 4, 2011 and bear
interest at 7.5%. As of January 3, 2010, the outstanding balance under
this agreement was $5.1 million.
Presentation
of Financial Information
Our
fiscal reporting periods consist of 53 or 52 weeks ending on the Sunday closest
to December 31 and are referred to herein as (1) “the year ended January 3,
2010” or “2009”, which consisted of 53 weeks and (2) “the year ended December
28, 2008” or “2008” and “the year ended December 31, 2007” or “2007,” both of
which consisted of 52 weeks.
Results
of Operations
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Amount
|
|
|
Change
|
|
|
Amount
|
|
|
Change
|
|
|
Amount
|
|
|
|
(in
millions)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
3,198.3 |
|
|
$ |
1,536.0 |
|
|
$ |
1,662.3 |
|
|
$ |
548.9 |
|
|
$ |
1,113.4 |
|
Franchise
revenues
|
|
|
382.5 |
|
|
|
222.0 |
|
|
|
160.5 |
|
|
|
73.5 |
|
|
|
87.0 |
|
Asset
management and related fees
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(63.3 |
) |
|
|
63.3 |
|
|
|
|
3,580.8 |
|
|
|
1,758.0 |
|
|
|
1,822.8 |
|
|
|
559.1 |
|
|
|
1,263.7 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
2,728.4 |
|
|
|
1,312.9 |
|
|
|
1,415.5 |
|
|
|
521.0 |
|
|
|
894.5 |
|
Cost
of services
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(25.2 |
) |
|
|
25.2 |
|
General
and administrative
|
|
|
452.7 |
|
|
|
204.0 |
|
|
|
248.7 |
|
|
|
43.3 |
|
|
|
205.4 |
|
Depreciation
and amortization
|
|
|
190.3 |
|
|
|
102.0 |
|
|
|
88.3 |
|
|
|
22.1 |
|
|
|
66.2 |
|
Goodwill
impairment
|
|
|
- |
|
|
|
(460.1 |
) |
|
|
460.1 |
|
|
|
460.1 |
|
|
|
- |
|
Impairment
of other long-lived assets
|
|
|
82.1 |
|
|
|
62.9 |
|
|
|
19.2 |
|
|
|
12.1 |
|
|
|
7.1 |
|
Facilities
relocation and corporate restructuring
|
|
|
11.0 |
|
|
|
7.1 |
|
|
|
3.9 |
|
|
|
(81.5 |
) |
|
|
85.4 |
|
Gain
on sale of consolidated business
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
40.2 |
|
|
|
(40.2 |
) |
Other
operating expense, net
|
|
|
4.3 |
|
|
|
3.6 |
|
|
|
0.7 |
|
|
|
0.5 |
|
|
|
0.2 |
|
|
|
|
3,468.8 |
|
|
|
1,232.4 |
|
|
|
2,236.4 |
|
|
|
992.6 |
|
|
|
1,243.8 |
|
Operating
profit (loss)
|
|
|
112.0 |
|
|
|
525.6 |
|
|
|
(413.6 |
) |
|
|
(433.5 |
) |
|
|
19.9 |
|
Interest
expense
|
|
|
(126.7 |
) |
|
|
(59.7 |
) |
|
|
(67.0 |
) |
|
|
(5.7 |
) |
|
|
(61.3 |
) |
Investment
(expense) income, net
|
|
|
(3.0 |
) |
|
|
(12.4 |
) |
|
|
9.4 |
|
|
|
(52.7 |
) |
|
|
62.1 |
|
Other
than temporary losses on investments
|
|
|
(3.9 |
) |
|
|
108.8 |
|
|
|
(112.7 |
) |
|
|
(102.8 |
) |
|
|
(9.9 |
) |
Other
income (expense), net
|
|
|
1.5 |
|
|
|
(1.2 |
) |
|
|
2.7 |
|
|
|
6.8 |
|
|
|
(4.1 |
) |
(Loss)
income from continuing operations before income taxes
|
|
|
(20.1 |
) |
|
|
561.1 |
|
|
|
(581.2 |
) |
|
|
(587.9 |
) |
|
|
6.7 |
|
Benefit
from income taxes
|
|
|
23.6 |
|
|
|
(75.7 |
) |
|
|
99.3 |
|
|
|
90.9 |
|
|
|
8.4 |
|
Income
(loss) from continuing operations
|
|
|
3.5 |
|
|
|
485.4 |
|
|
|
(481.9 |
) |
|
|
(497.0 |
) |
|
|
15.1 |
|
Income
from discontinued operations, net of income taxes
|
|
|
1.6 |
|
|
|
(0.6 |
) |
|
|
2.2 |
|
|
|
1.2 |
|
|
|
1.0 |
|
Net
income (loss)
|
|
$ |
5.1 |
|
|
$ |
484.8 |
|
|
$ |
(479.7 |
) |
|
$ |
(495.8 |
) |
|
$ |
16.1 |
|
Restaurant
statistics:
|
|
|
|
|
|
Wendy’s
same-store sales (a):
|
2009
|
|
Fourth
Quarter 2008
|
|
|
North
America Company-owned restaurants
|
(1.7)%
|
|
3.6%
|
|
|
North
America franchised restaurants
|
(0.3)%
|
|
3.8%
|
|
|
North
America systemwide
|
(0.7)%
|
|
3.7%
|
|
|
|
|
|
|
|
|
Arby’s
same-store sales:
|
2009
|
|
2008
|
|
2007
|
North
America Company-owned restaurants
|
(8.2)%
|
|
(5.8)%
|
|
(1.3)%
|
North
America franchised restaurants
|
(9.0)%
|
|
(3.6)%
|
|
1.1%
|
North
America systemwide
|
(8.8)%
|
|
(4.3)%
|
|
0.3%
|
|
|
|
|
|
|
Restaurant
margin:
|
|
|
|
|
|
|
2009
|
|
Fourth
Quarter 2008
|
|
|
Wendy’s
(a)
|
14.9%
|
|
11.7%
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
Arby’s
|
13.9%
|
|
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
|
Opened
|
10
|
|
53
|
|
63
|
Closed
|
(13)
|
|
(139)
|
|
(152)
|
Net
(sold to) purchased by franchisees
|
(12)
|
|
12
|
|
-
|
Restaurant
count at January 3, 2010
|
1,391
|
|
5,150
|
|
6,541
|
|
|
|
|
|
|
Arby’s
restaurant count:
|
|
|
|
|
|
Restaurant
count at December 30, 2007
|
1,106
|
|
2,582
|
|
3,688
|
Opened
|
40
|
|
87
|
|
127
|
Closed
|
(15)
|
|
(44)
|
|
(59)
|
Net
purchased from (sold by) franchisees
|
45
|
|
(45)
|
|
-
|
Restaurant
count at December 28, 2008
|
1,176
|
|
2,580
|
|
3,756
|
Opened
|
5
|
|
54
|
|
59
|
Closed
|
(23)
|
|
(74)
|
|
(97)
|
Net
purchased from (sold by) franchisees
|
11
|
|
(11)
|
|
-
|
Restaurant
count at January 3, 2010
|
1,169
|
|
2,549
|
|
3,718
|
Total
Wendy’s/Arby’s restaurant count at January 3, 2010
|
2,560
|
|
7,699
|
|
10,259
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(52
weeks)
|
|
|
|
|
|
|
|
Company-owned
average unit volumes:
|
|
(in
thousands)
|
|
Wendy’s
– North America
|
|
$ |
1,421.9 |
|
|
$ |
1,452.9 |
|
|
$ |
1,436.7 |
|
Arby’s
– North America
|
|
$ |
896.7 |
|
|
$ |
966.9 |
|
|
$ |
1,016.0 |
|
________________
|
(a)
|
Wendy’s
data for 2008, 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.
|
Sales
|
|
|
|
|
|
Change
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
millions)
|
|
|
|
|
|
Wendy’s
|
|
$ |
1,603.3 |
|
|
$ |
530.8 |
|
Arby’s
|
|
|
(67.3 |
) |
|
|
18.1 |
|
|
|
$ |
1,536.0 |
|
|
$ |
548.9 |
|
The
increase in sales in both 2009 and 2008 was primarily due to the Wendy’s Merger.
In addition, sales for the 53rd week
in 2009 for Wendy’s and Arby’s were $35.3 million and $15.9 million,
respectively. Wendy’s North America Company-owned same-store sales for 2009,
excluding the impact of fewer restaurants serving breakfast in 2009 as compared
to 2008 and the effect of the 53rd week
in 2009, would have decreased approximately 0.3%. In 2009, Arby’s sales decrease
was primarily attributable to the 8.2% decrease in Arby’s North America
Company-owned same-store sales. In 2008, Arby’s sales increase was
attributable to the $80.0 million increase in sales from the 70 net Arby’s North
America Company-owned restaurants added in 2008 as substantially offset by a
$61.9 million decrease in sales due to a 5.8% decrease in Arby’s North America
Company-owned same-store sales. Of the 45 net restaurants acquired
from franchisees in 2008, 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.
In 2009
and 2008 Arby’s North America Company-owned same-store sales were impacted by
the restaurant industry trends, negative general economic trends and competitive
pressures described in “Introduction and Executive Overview – Our
Business.” In addition, the 2009 Arby’s same-store sales were
negatively impacted by a decrease in the number of national advertising
campaigns; however, certain aggressive Arby’s value promotions partially
mitigated this negative impact.
Franchise
Revenues
|
|
|
|
|
|
Change
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
millions)
|
|
Wendy’s
|
|
$ |
228.2 |
|
|
$ |
74.6 |
|
Arby’s
|
|
|
(6.2 |
) |
|
|
(1.1 |
) |
|
|
$ |
222.0 |
|
|
$ |
73.5 |
|
The
increase in franchise revenues in both 2009 and 2008 was primarily due to the
Wendy’s Merger. Wendy’s franchised restaurant sales were not significantly
impacted by changes in the number of restaurants serving breakfast in 2009.
Wendy’s franchised restaurant closings include 71 restaurants in Japan which
closed at the expiration of the franchise agreement on December 31, 2009.
Franchise revenues for the 53rd week
in 2009 for Wendy’s and Arby’s were approximately $4.8 million and $1.3 million,
respectively. The decrease in Arby’s franchise revenues in 2009 was primarily
attributable to the 9.0% decrease in same-store sales for North America
franchised restaurants. The 2008 decrease was primarily attributable
to the effect of the January 2008 acquisition of the California Restaurants
whereby previously franchised restaurants became Company-owned and the 3.6%
decrease in same-store sales for Arby’s franchised restaurants.
In 2009
and 2008, same-store sales of our Arby’s franchised restaurants were negatively
impacted by the same industry and economic factors mentioned
above. In addition, in 2009, the franchised restaurants were
disproportionately negatively affected by less national media advertising as
certain underpenetrated franchise markets did not have sufficient local media
advertising to offset the decrease in national advertising. In 2008,
however, the use of incremental national media advertising had a positive effect
on the Arby’s franchised restaurants which slightly offset the negative impact
of the industry and economic factors discussed above.
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 2009 or 2008. Our asset management and related
fees in 2007 were generated entirely from the management of CDOs and Funds by
Deerfield.
Restaurant
Margin
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Amount
|
Change
|
|
Amount
|
Change
|
|
Amount
|
|
|
|
|
|
|
|
|
Wendy’s
|
14.9%
|
N/A
|
|
11.7%
(a)
|
N/A
|
|
N/A
|
Arby’s
|
13.9%
|
(2.2)
ppt
|
|
16.1%
|
(3.6)
ppt
|
|
19.7%
|
Consolidated
|
14.6%
|
(0.2)
ppt
|
|
14.7%
|
(5.0)
ppt
|
|
19.7%
|
________
|
(a)
The 2008 Wendy’s restaurant margin includes only the 2008 fourth
quarter.
|
The
percentage increase in the Wendy’s restaurant margin in 2009 as compared to the
fourth quarter of 2008 was primarily attributable to improvements in labor and
certain controllable costs, partially due to ongoing operational improvements
and the effect of price increases in 2009. The percentage decrease in
the Arby’s restaurant margin in 2009 as compared to 2008 was primarily
attributable to the effect of the decrease in Arby’s same-store sales without
comparable reductions in fixed and semi-variable costs and the targeted product
discounting of a number of Arby’s menu items which was partially offset by
decreases in commodity costs. The impact of the 53rd week
in 2009 on restaurant margin was not material for either brand.
The
percentage decrease in the Arby’s restaurant margin in 2008 as compared to 2007
was due to (1) the effect of the decrease in Arby’s same-store sales without
comparable reductions in fixed and semi-variable costs, (2) higher utilities,
(3) fuel costs under new distribution contracts that became effective in the
third quarter of 2007, (4) increased advertising which was anticipated to
generate additional customer traffic but did not, (5) an increase in labor costs
primarily due to the effect of Federal and state minimum wage increases in 2008
and (6) higher 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 2009 or
2008. For 2007, our cost of services was from the management of CDOs
and Funds by Deerfield.
General
and Administrative
|
|
|
|
|
|
Change
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
Wendy’s
Merger
|
|
$ |
161.7 |
|
|
$ |
79.5 |
|
Wendy’s
Co-op Agreement
|
|
|
15.5 |
|
|
|
- |
|
Integration
costs related to the Wendy’s Merger
|
|
|
14.3 |
|
|
|
2.3 |
|
Incentive
compensation
|
|
|
9.7 |
|
|
|
(9.8 |
) |
Provision
for doubtful accounts
|
|
|
6.5 |
|
|
|
0.5 |
|
Salaries
and wages
|
|
|
4.0 |
|
|
|
4.5 |
|
Services
agreements
|
|
|
(5.3 |
) |
|
|
3.5 |
|
Aircraft
expenses
|
|
|
(2.1 |
) |
|
|
(0.4 |
) |
Asset
management segment costs
|
|
|
- |
|
|
|
(24.8 |
) |
Corporate
Restructuring
|
|
|
- |
|
|
|
(14.0 |
) |
Relocation
costs
|
|
|
- |
|
|
|
(2.2 |
) |
Other
|
|
|
(0.3 |
) |
|
|
4.2 |
|
|
|
$ |
204.0 |
|
|
$ |
43.3 |
|
The
increases for 2009 and 2008 were primarily due to the Wendy’s Merger as well as
increases in (1) integration costs related to the Wendy’s Merger which increased
to $16.6 million in 2009 from $2.3 million in 2008 and (2) salaries and wages
due to staffing and other expenses associated with the establishment of the
shared services center in Atlanta, Georgia. Our 2009 general and administrative
expenses were also significantly impacted by (1) required future payments
expensed in the 2009 fourth quarter as a result of the Wendy’s Co-op Agreement,
(2) increases in certain incentive compensation accruals due to stronger
consolidated operating performance versus plan in 2009 as compared to weaker
consolidated operating performance versus plan in 2008 and (3) an increase in
the provision for doubtful accounts primarily associated with the collectability
of Arby’s franchisee receivables. The 2009 increases in general and
administrative expenses were partially offset by (1) a decrease in fees for the
New Services Agreement, as compared to fees incurred under the Services
Agreement in 2008 and (2) a decrease in costs associated with our corporate
aircraft as a result of the termination of the time share agreements and the
establishment of a new aircraft lease agreement with the Principals and the
Management Company, and the sale of one of the aircraft in 2009. Our 2008
general and administrative expenses were also impacted by an increase associated
with the full year effect of fees for professional and strategic services
provided to us under the Services Agreement that became effective in June 2007
as part of the Corporate Restructuring. The 2008 increases in general and
administrative
expenses
were partially offset by (1) expenses incurred in 2007 by our former asset
management segment, which did not recur in 2008 as a result of the Deerfield
Sale in December 2007, (2) a decrease in corporate general and administrative
expenses as a result of the completion of our Corporate Restructuring which
commenced in 2007, (3) a decrease in incentive compensation accruals due to
weaker consolidated operating performance versus plan in 2008 as compared to our
operating performance versus plan in 2007 and (4) a 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.
Depreciation
and Amortization
|
|
|
|
|
|
Change
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
millions)
|
|
Wendy’s
restaurants, primarily properties
|
|
$ |
104.2 |
|
|
$ |
23.8 |
|
Arby’s
restaurants, primarily properties
|
|
|
(5.0 |
) |
|
|
4.3 |
|
Asset
management
|
|
|
- |
|
|
|
(4.9 |
) |
General
corporate
|
|
|
2.8 |
|
|
|
(1.1 |
) |
|
|
$ |
102.0 |
|
|
$ |
22.1 |
|
The 2009
and 2008 increases were primarily related to the increase in long-lived assets
as a result of the Wendy’s Merger. The 2009 increase was also affected by a $6.5
million one-time increase in depreciation as a result of refinements to the
Wendy’s purchase price allocation (including long-lived assets) which was
recorded in the 2009 first quarter and by an increase in the amortization of
capitalized software related to the Wendy’s Merger integration and the
establishment of the shared services center in Atlanta, Georgia. These 2009
increases were partially offset by the reduction in depreciation of Arby’s
long-lived assets for which we have recorded impairment charges. The 2008
increase was also affected by the increase in long-lived assets as a result of
the California Restaurant Acquisition and other new and remodeled units
partially offset by a decrease in depreciation and amortization charges from our
asset management business as a result of the Deerfield Sale.
Goodwill
Impairment
We
operate 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.
We
performed our annual goodwill impairment test in the fourth quarters of each of
the fiscal years presented. As a result of our testing, we concluded that the
fair value of the Wendy’s reporting units in 2009 and 2008 and the Arby’s
franchise reporting unit in all three years exceeded their respective carrying
amounts. In 2008, 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 recorded impairment
charges of $460.1 million in 2008. As of the end of 2009 and 2008, we did not
have any goodwill recorded for our Arby’s Company-owned restaurants reporting
units. There was no impairment of the Arby’s Company-owned restaurants reporting
unit in 2007.
Impairment
of Other Long-Lived Assets
|
|
|
|
|
|
Change
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
millions)
|
|
Arby’s
restaurants, primarily properties at underperforming
locations
|
|
$ |
48.5 |
|
|
$ |
5.4 |
|
Wendy’s
restaurants, primarily properties at underperforming
locations
|
|
|
21.9 |
|
|
|
1.6 |
|
Asset
management
|
|
|
- |
|
|
|
(4.5 |
) |
General
corporate, aircraft
|
|
|
(7.5 |
) |
|
|
9.6 |
|
|
|
$ |
62.9 |
|
|
$ |
12.1 |
|
The
increases in charges for the impairment of other long-lived assets was primarily
the result of the deterioration in operating performance of certain Wendy’s (in
2009 only) and Arby’s restaurants (for all years presented). We also recorded
impairment on one of our corporate aircraft held-for-sale in 2008 and, to a
lesser extent, in 2009. The increases in 2008 were partially offset by the
impairment in 2007 of other long-lived assets in our asset management business
which did not recur as a result of the Deerfield Sale.
Facilities
Relocation and Corporate Restructuring
|
|
|
|
|
|
Change
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
millions)
|
|
Restaurants,
primarily Wendy’s severance costs
|
|
$ |
7.1 |
|
|
$ |
2.5 |
|
General
corporate, Corporate Restructuring (completed in 2007)
|
|
|
- |
|
|
|
(84.0 |
) |
|
|
$ |
7.1 |
|
|
$ |
(81.5 |
) |
Interest
Expense
|
|
|
|
|
|
Change
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
millions)
|
|
Senior
Notes
|
|
$ |
32.0 |
|
|
$ |
- |
|
Wendy’s
debt
|
|
|
31.6 |
|
|
|
10.7 |
|
Financing
cost
|
|
|
6.1 |
|
|
|
1.8 |
|
Arby’s
debt
|
|
|
1.1 |
|
|
|
3.3 |
|
Corporate
debt
|
|
|
0.8 |
|
|
|
(0.2 |
) |
Senior
secured term loan
|
|
|
(11.2 |
) |
|
|
(9.2 |
) |
Other
|
|
|
(0.7 |
) |
|
|
(0.7 |
) |
|
|
$ |
59.7 |
|
|
$ |
5.7 |
|
The 2009
expense was principally affected by interest on the Senior Notes issued in June
2009 as discussed below under “Liquidity and Capital Resources – Senior Notes”
as well as, in both 2009 and 2008, interest expense on debt assumed as a result
of the Wendy’s Merger. Excluding the effect of the Senior Notes issuance and the
effect of the Wendy’s debt assumed, the decrease in 2009 interest expense was
primarily due to a net decrease in the senior secured term loan interest expense
as a result of significant voluntary prepayments, partially offset by the
write-off of financing costs related to these prepayments and an increase in the
interest rate on such loan. See “Liquidity and Capital Resources –
Senior Secured Term Loan” below for further discussion. Excluding the
effect of the Wendy’s Merger on the 2008 fourth quarter, the decrease in the
2008 expense was primarily due to a decrease in interest expense due to
voluntary prepayments of the senior secured term loan as well as a decrease in
the variable interest rates as compared to 2007.
Investment
(Expense) Income, Net
|
|
|
|
|
|
Change
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
millions)
|
|
Recognized
net gains
|
|
$ |
(4.5 |
) |
|
$ |
(44.1 |
) |
Withdrawal
Fee
|
|
|
(5.5 |
) |
|
|
- |
|
Interest
income
|
|
|
(1.0 |
) |
|
|
(7.8 |
) |
Other
|
|
|
(1.4 |
) |
|
|
(0.8 |
) |
|
|
$ |
(12.4 |
) |
|
$ |
(52.7 |
) |
Our net
gains include realized gains on available-for-sale securities and cost method
investments and unrealized and realized gains on derivative instruments. The
change in our recognized net gains in 2009 is primarily due to: (1) $2.8 million
of net unrealized and realized losses on swap derivatives held in 2008, (2) $2.3
million of net gains that were realized upon the Equities Sale and (3) a $2.2
million decrease in net realized losses on available for sale securities held in
2008 as offset by (1) a $9.0 decrease in net unrealized and realized gains on
securities sold short held in 2008, (2) $1.2 million of realized losses on
securities sold short in 2009, (3) $0.8 million decrease in unrealized gains on
put and call option derivatives that were sold in 2009 and (4) $0.8 million
decrease in gains from the sale of cost method investments. The Withdrawal Fee
relates to the fee paid to the Management Company for the Equities Sale as
discussed in “Introduction and Executive Overview – Equities Account.” The
change in our recognized net gains in 2008 is primarily related to: (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 established for the benefit of the Former Executives.
In 2008,
our interest income decreased 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
|
|
|
|
|
|
Change
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
millions)
|
|
DFR
common stock
|
|
$ |
(68.1 |
) |
|
$ |
68.1 |
|
DFR
Notes
|
|
|
(21.2 |
) |
|
|
21.2 |
|
Available-for-sale
securities, including CDOs
|
|
|
(12.3 |
) |
|
|
3.2 |
|
Cost
method investments
|
|
|
(7.2 |
) |
|
|
10.3 |
|
|
|
$ |
(108.8 |
) |
|
$ |
102.8 |
|
|
·
|
Losses
due to the reduction in value of our
investments
|
Based on
a review of our unrealized investment losses in 2009, 2008 and 2007, 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
certain common stock, certain available-for-sale securities and certain cost
method investments.
The 2009
decrease in losses due to reduction in value of our investments was principally
impacted by the 2008 loss on our DFR common stock discussed in “Introduction and
Executive Overview – Deerfield”, which did not recur. In addition,
2009 losses on certain available-for-sale securities were not as significant due
primarily to the Equities Sale in June 2009. Losses in 2009 related
to cost method investments were not as significant due to improved market
conditions as compared to 2008. The 2008 increase in losses on available-for
sale securities and $1.8 million of the increase in losses on cost method
investments was primarily due to a reduction in the value of these investments
due to overall market conditions as compared to 2007.
|
·
|
Losses
due to investment collectability
|
There
were no losses due to investment collectability in 2009. The 2008 increase in
losses due to investment collectability was impacted by the allowance for
doubtful collectability on the DFR Notes, discussed above in “Introduction and
Executive Overview – Deerfield.”
|
·
|
Losses
due to illiquidity
|
There
were no 2009 losses due to illiquidity. The 2008 increase in losses due to
illiquidity was due to the 2008 write-down of $8.5 million on 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, economic conditions, illiquidity of the private company stock, and our
internal valuations of Jurlique, we determined that our investment in this
company was more than likely not recoverable.
Benefit
from Income Taxes
|
|
|
|
|
|
Change
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
millions)
|
|
Federal
and state benefit (provision) on variance in (loss) income from continuing
operations before tax
|
|
$ |
(200.8 |
) |
|
$ |
212.9 |
|
Foreign
tax credits net of tax on distribution of foreign earnings
|
|
|
(9.2 |
) |
|
|
9.2 |
|
Recognition
of tax benefit of state net operating losses as a result of dissolution of
our captive insurance company
|
|
|
9.6 |
|
|
|
- |
|
Goodwill
impairment
|
|
|
99.7 |
|
|
|
(99.7 |
) |
DFR
common stock
|
|
|
20.3 |
|
|
|
(20.3 |
) |
Canadian
tax rate changes
|
|
|
2.0 |
|
|
|
- |
|
Recognition
of tax benefit from settlement of certain obligations to the Former
Executives
|
|
|
- |
|
|
|
(12.5 |
) |
Other
|
|
|
2.7 |
|
|
|
1.3 |
|
|
|
$ |
(75.7 |
) |
|
$ |
90.9 |
|
Our
income taxes in 2009, 2008 and 2007 were impacted by variations in (loss) income
from continuing operations before tax adjusted for recurring items, such as
non-deductible expenses, state income taxes and adjustments related to prior
year tax matters, as well as non-recurring, discrete items. Discrete
items may occur in any given year, but are not consistent from year to
year. Taxes changed as a result of discrete items of (1) the 2009 tax
benefit on recognizing previously unrecognized state net operating losses, net
of valuation allowances, in connection with the dissolution of our captive
insurance company, (2) the 2008 tax provision 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, (3) the 2008 tax provision 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 in “Introduction and Executive Overview – Deerfield”, (4) the 2008
tax benefit on foreign tax credits net of related taxes on the distribution of
foreign earnings and (5) the 2007 tax benefit on recognizing a previously
unrecognized contingent tax benefit in connection with the settlement of certain
obligations to the Former Executives.
Income
from Discontinued Operations, Net of Income Taxes
|
|
|
|
|
|
Change
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
Income
from discontinued operations before income taxes
|
|
$ |
0.5 |
|
|
$ |
0.4 |
|
Income
tax changes due to settlements of income tax matters
|
|
|
(0.6 |
) |
|
|
0.6 |
|
(Provision
for) benefit from income taxes
|
|
|
(0.5 |
) |
|
|
0.2 |
|
|
|
$ |
(0.6 |
) |
|
$ |
1.2 |
|
The
changes in the income from discontinued operations for 2009 and 2008 represent
transactions related to the settlement of income tax and other matters from our
former premium beverage and soft drink concentrate business and our former
utility and municipal services and refrigeration business segments.
Outlook
for 2010
Sales
We
anticipate that certain of the negative factors described above which affected
our 2009 Company-owned same-store sales, including current restaurant
industry-wide sales trends, the uncertain economic environment, high
unemployment and competitive discounting, will continue to negatively impact
sales for 2010. We expect that Wendy’s increasing emphasis on everyday value
products, as well as anticipated menu mix in 2010, which includes the
introduction of new premium products, will have a favorable impact on sales. In
addition, we anticipate that Arby’s increasing emphasis on everyday value menu
items will have a favorable impact on sales. For 2010, the net impact of
new store openings and closings is not expected to have a significant impact on
consolidated sales.
Franchise
Revenues
We expect
that the sales trends for franchised restaurants at Wendy’s and Arby’s will
continue to be generally impacted by many of the same factors described above
under “Sales.” Due to the economic environment and potential
franchise closures, contributions to Arby’s local advertising cooperatives may
decrease. The decrease in local marketing activity should be offset by the
increase in national media.
Restaurant
Margin
Except
for the cost of commodities which is not expected to significantly impact the
restaurant margins for Wendy’s and Arby’s in 2010, we expect that the other
factors described above which affected restaurant margin for Company-owned
restaurants in 2009 for the Wendy’s and Arby’s brands will continue to impact
restaurant margin in 2010. The Wendy’s restaurant margin is expected
to be favorably impacted by a continuation of the cost controls implemented
throughout 2009. We expect that the effect on Arby’s restaurant margins of the
emphasis on everyday value menu items will be significantly offset by a
reduction in other discounted product promotional activity.
General
and Administrative
We expect
that our general and administrative expenses will decrease in 2010 primarily as
a result of the 2009 accrual for the formation of the Wendy’s Co-op as discussed
in “Introduction and Executive Overview – Supply Chain Relationship Agreement,”
which will not recur, a decrease in integration costs related to the Wendy’s
Merger and continued merger-related synergies and other cost savings
initiatives.
Depreciation
and Amortization
We expect
that our depreciation and amortization expenses will decrease in 2010 primarily
due to the additional depreciation that resulted from valuation adjustments on
long-lived assets from the Wendy’s Merger, which was recorded in the 2009 first
quarter and will not recur, and a reduction in depreciation of Wendy’s and
Arby’s long-lived assets for which we have recorded impairment charges in
2009.
Facilities
Relocation and Corporate Restructuring
We do not
expect to incur additional facilities relocation and corporate restructuring
charges with respect to the Wendy’s Merger in 2010.
Interest
Expense
We expect
that our interest expense for 2010 will increase compared to 2009 primarily as a
result of the full year effect of interest expense on the Senior Notes discussed
in “Liquidity and Capital Resources – Long-term Debt” and the effect of
increased interest rates under our amended senior secured term
loan. These increases are expected to be partially offset by the
effect on interest expense of the 2009 prepayment of the senior secured term
loan and the full year effect of the interest rate swaps discussed in “Liquidity
and Capital Resources – Derivatives.”
Liquidity
and Capital Resources
Sources
and Uses of Cash for 2009
Cash and cash equivalents (“cash”)
totaled $591.7 million at January 3, 2010 compared to $90.1 million at December
28, 2008. For the year ended January 3, 2010, net cash provided by
operating activities totaled $298.8 million, primarily from the following
significant items:
|
·
|
Our
net income of $5.1 million;
|
|
·
|
Depreciation
and amortization of $190.3 million;
|
|
·
|
Impairment
of other long-lived assets charges of $82.1
million;
|
|
·
|
The
write-off and amortization of deferred financing costs of $15.8
million;
|
|
·
|
Distributions
received from our investment in a joint venture of $14.6 million;
and
|
|
·
|
Changes
in operating assets and liabilities which resulted in a net use of cash of
$2.7 million primarily due to a $6.1 million increase in accounts and
notes receivable and a $2.5 million decrease in accounts payable, accrued
expenses and other current liabilities partially offset by a $1.9 million
decrease in inventories and a $4.0 million decrease in prepaid expenses
and other current assets.
|
Additionally,
for the year ended January 3, 2010, we had the following significant sources and
uses of cash other than from operating activities:
|
·
|
Proceeds
of $607.5 million primarily from the issuance of the Senior Notes
discussed below under “Long-term
Debt”;
|
|
·
|
Net
repayments of other long-term debt of $210.4 million, including a
prepayment of $132.5 million on our senior secured term
loan;
|
|
·
|
Cash
capital expenditures totaling $101.9 million, including the construction
of new restaurants (approximately $18.1 million) and the remodeling of
existing restaurants;
|
|
·
|
Deferred
financing costs of $38.4 million;
|
|
·
|
Net
investment proceeds of $38.1
million;
|
|
·
|
Repurchases
of common stock of $72.9 million, including commissions of $0.3 million
and excluding $5.8 million of repurchases that were not settled until
after year end; and
|
|
·
|
Dividend
payments of $28.0 million.
|
The net
cash provided by continuing operations before the effect of exchange rate
changes on cash was approximately $502.6 million.
Sources
and Uses of Cash for 2010
Our
anticipated consolidated cash requirements for continuing operations for 2010,
exclusive of operating cash flow requirements, consist principally
of:
|
·
|
Cash
capital expenditures of approximately $165.0 million as discussed below in
“Capital Expenditures”;
|
|
·
|
Quarterly
cash dividends aggregating up to approximately $26.6 million as discussed
below in “Dividends”;
|
|
·
|
Scheduled
debt principal repayments aggregating $22.1 million, including a $5.0
million mandatory prepayment on our secured equipment term
loan;
|
|
·
|
Potential
repurchases of common stock of up to $121.6 million (including $5.8
million of repurchases in 2009 that were not settled until after the 2009
year end) under the currently authorized stock buyback program, including
$41.8 million, excluding commissions of $0.2 million, already purchased
through February 26, 2010;
|
|
·
|
Scheduled
payments of $14.3 million pursuant to the Co-op
Agreement;
|
|
·
|
Severance
payments of approximately $5.8 million related to our facilities
relocation and corporate restructuring accruals;
and
|
|
·
|
The
costs of any potential business acquisitions or financing
activities.
|
Based upon current levels of
operations, we expect that cash flows from operations and available cash will
provide sufficient liquidity to meet operating cash requirements for the next
twelve months.
Working
Capital and Capitalization
Working
capital, which equals current assets less current liabilities, was $403.8
million at January 3, 2010, reflecting a current ratio, which equals current
assets divided by current liabilities, of 1.8:1. Working capital at January 3,
2010 increased $525.5 million from a deficit
of $121.7 million at December 28, 2008, primarily due to $298.8 million in net
cash provided by continuing operating activities and $259.4 million in net cash
provided by continuing financing activities.
Our total
capitalization at January 3, 2010 was $3,859.2 million, consisting of
stockholders’ equity of $2,336.3 million and long-term debt of $1,522.9 million,
including current portion. Our total capitalization at January 3,
2010 increased $364.2 million from $3,495.0 million at December 28, 2008 and was
principally impacted by the following:
|
·
|
The
$411.3 million net increase in long-term debt is principally due to the
issuance of $565.0 million principal amount of Senior Notes
less the $132.5 million prepayment on our senior secured term
loan;
|
|
·
|
Cash
dividends paid of $28.0 million;
|
|
·
|
Net
income of $5.1 million;
|
|
·
|
The
components of “Accumulated other comprehensive loss,” that are not
included in the calculation of net income, of which $37.6 million
principally reflects the currency translation adjustment in 2009;
and
|
|
·
|
Repurchases
of common stock of $78.4 million, excluding commissions of $0.3 million
and including $5.8 million of repurchases that were not settled until
after year end.
|
Long-term
Debt
|
|
|
|
|
|
As
of January 3,
|
|
|
|
2010
|
|
|
|
(in
millions)
|
|
10.00%
Senior Notes
|
|
$ |
551.8 |
|
Senior
secured term loan
|
|
|
251.5 |
|
6.20%
senior notes
|
|
|
204.3 |
|
6.25%
senior notes
|
|
|
193.6 |
|
Sale-leaseback
obligations, excluding interest
|
|
|
125.2 |
|
Capitalized
lease obligations, excluding interest
|
|
|
89.9 |
|
7%
Debentures
|
|
|
80.1 |
|
Secured
equipment term loan
|
|
|
18.9 |
|
Other
|
|
|
7.6 |
|
|
|
$ |
1,522.9 |
|
Except as
described below, there were no material changes to the terms of any debt
obligations since December 28, 2008. See Note 8 of the Consolidated
Financial Statements contained in Item 8 of this document for more information
related to our long-term debt obligations.
Senior
Notes
On June
23, 2009, our subsidiary Wendy’s/Arby’s Restaurants issued $565.0 million
principal amount of Senior Notes. The Senior Notes will mature on July 15, 2016
and accrue interest at 10.00% per annum, payable semi-annually on January 15 and
July 15. The first payment was made on January 15, 2010. The Senior
Notes were issued at 97.533% of the principal amount, representing a yield to
maturity of 10.50% and resulting in net proceeds paid to us of $551.1 million.
The $13.9 million discount is being accreted and the related charge included in
“Interest expense” until the Senior Notes mature. The Senior Notes are fully and
unconditionally guaranteed, jointly and severally, on an unsecured basis by the
Guarantors.
An
Indenture for the Senior Notes dated as of June 23, 2009 (the “Indenture”) among
Wendy’s/Arby’s Restaurants, the Guarantors and U.S. Bank National Association,
as trustee (the “Trustee”), includes certain customary covenants that, subject
to a number of important exceptions and qualifications, limit the ability of
Wendy’s/Arby’s Restaurants and its restricted subsidiaries to, among other
things, incur debt or issue preferred or disqualified stock, pay dividends on
equity interests, redeem or repurchase equity interests or prepay or repurchase
subordinated debt, make some types of investments and sell assets, incur certain
liens, engage in transactions with affiliates (except on an arms-length basis),
and consolidate, merge or sell all or substantially all of their
assets. The covenants generally do not restrict Wendy’s/Arby’s or any
of its subsidiaries that are not Wendy’s/Arby’s Restaurants’
subsidiaries.
Senior
Secured Term Loan
The
Arby’s Credit Agreement was amended and restated as of March 11, 2009 and
includes an amended senior secured term loan (the “Amended Term Loan”) and an
amended senior secured revolving credit facility (the “Amended
Revolver”). As a result of an agreement entered into on March 17,
2009, the amount of the Amended Revolver increased from $100.0 million to $170.0
million. Also, Wendy’s and certain of its affiliates became
co-obligors in addition to Arby’s and certain of its affiliates. The
Amended Term Loan is due July 2012 and the Amended Revolver expires in July
2011.
On June
10, 2009, Wendy’s/Arby’s Restaurants entered into an Amendment No. 1 to the
amended and restated Arby’s Credit Agreement (as so amended, the “Credit
Agreement”) which, among other things (1) permitted the issuance by
Wendy’s/Arby’s Restaurants of the Senior Notes described above and the
incurrence of such debt, and permitted Wendy’s/Arby’s Restaurants to dividend to
Wendy’s/Arby’s the net cash proceeds of the Senior Notes issuance less $132.5
million used to prepay the Amended Term Loan and pay accrued interest thereon
and certain other payments, (2) modified certain total leverage financial
covenants, added certain financial covenants based on senior secured leverage
ratios and modified the minimum interest coverage ratio, (3) permitted the
prepayment at any time prior to maturity of certain senior notes of Wendy’s and
eliminated certain incremental debt baskets in the covenant prohibiting the
incurrence of additional indebtedness and (4) modified the interest margins to
provide that the margins will fluctuate based on Wendy’s/Arby’s Restaurants’
corporate credit rating.
The
Amended Term Loan and amounts borrowed under the Amended Revolver under the
Credit Agreement bear interest at our option at either (1) the Eurodollar Rate
(as defined in the Credit Agreement), as adjusted pursuant to applicable
regulations (but not less than 2.75%), plus an interest rate margin of 4.00%,
4.50%, 5.00% or 6.00% per annum, depending on Wendy’s/Arby’s Restaurants’
corporate credit rating, or (2) the Base Rate (as defined in the Credit
Agreement), which is the higher of the interest rate announced by the
administrative agent for the Credit Agreement as its base rate and the Federal
funds rate plus 0.50% (but not less that 3.75%), in either case plus an interest
rate margin of 3.00%, 3.50%, 4.00% or 5.00% per annum, depending on
Wendy’s/Arby’s Restaurants’ corporate credit rating. Based on Wendy’s/Arby’s
Restaurants’ corporate credit rating at the effective date of Amendment No. 1
and as of January 3, 2010, the applicable interest rate margins available to us
were 4.50% for Eurodollar Rate borrowings and 3.50% for Base
Rate
borrowings. Since the effective date of Amendment No. 1 and as of January 3,
2010, we have elected to use the Base Rate which resulted in a rate of 7.25% as
of January 3, 2010.
Concurrent
with the closing of the issuance of the Senior Notes, we prepaid the Amended
Term Loan in an aggregate principal amount of $132.5 million and accrued
interest thereon.
During
2009, we borrowed a net total of $51.2 million under the Amended Revolver,
however, no amounts were outstanding as of January 3, 2010. The Amended Revolver
includes a sub-facility for the issuance of letters of credit up to $50.0
million. The availability under the Amended Revolver as of January 3,
2010 was $136.4 million, which is net of $33.6 million for outstanding letters
of credit.
Other
Revolving Credit Facilities
Wendy’s
U.S. advertising fund has a revolving line of credit of $25.0 million. Neither
the Company nor Wendy’s guarantees this debt. The advertising fund facility was
established to fund the advertising fund operations. The availability
under this line of credit as of January 3, 2010 was $20.3 million.
At
January 3, 2010, one of Wendy’s Canadian subsidiaries had a revolving credit
facility of C$6.0 million which bears interest at the Bank of Montreal Prime
Rate and is guaranteed by Wendy’s. The availability under this facility as of
January 3, 2010 was C$5.7 million.
AFA’s
bank line of credit matured and was not renewed as of January 2010. In
connection with the establishment of a revolving loan agreement with ARG
discussed above under “Introduction and Executive Overview – Related Party
Transactions,” AFA drew on the ARG line and repaid all amounts outstanding under
its bank line of credit on December 28, 2009.
On
December 31, 2009, AFA entered into a revolving loan agreement with ARG.
This agreement, which provided for ARG to make revolving loans of up to $5.5
million to AFA, was amended on February 25, 2010 to provide for revolving loans
up to $14.5 million. Under the terms of this agreement, outstanding
amounts are due through April 4, 2011 and bear interest at 7.5%. As of
January 3, 2010, the outstanding balance under this agreement was $5.1
million.
Derivatives
During
the third quarter of 2009, we entered into several interest rate swap agreements
(the “Interest Rate Swaps”) with notional amounts totaling $361.0 million that
swap the fixed rate interest rates on our 6.20% and 6.25% Wendy’s Senior Notes
for floating rates. The Company’s primary objective for entering into derivative
instruments is to manage its exposure to changes in interest rates, as well as
to maintain an appropriate mix of fixed and variable rate debt. The Interest
Rate Swaps are accounted for as fair value hedges and qualify for the short-cut
method under the applicable guidance. At January 3, 2010, the fair value of our
Interest Rate Swaps was $1.6 million and has been included in “Deferred costs
and other assets” and as an adjustment to the carrying amount of the 6.20% and
6.25% Wendy’s Senior Notes.
Debt
Covenants
The
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. We were in compliance with all the covenants of the Credit
Agreement as of January 3, 2010 and we expect to remain in compliance with all
of these covenants for the next twelve months. As of January 3, 2010, there was
$306.5 million available for the payment of dividends indirectly to
Wendy’s/Arby’s under the covenants of the Credit Agreement which includes the
net proceeds, as defined, from the Senior Notes less any dividends paid since
their issuance.
The
indentures that govern Wendy’s 6.20% and 6.25% Senior Notes and 7% Debentures
(the "Wendy's Notes") contain covenants that specify limits on the incurrence of
indebtedness. We were in compliance with these covenants as of January 3, 2010
and project that we will be in compliance with these covenants for the next
twelve months.
A
significant number of the underlying leases in the Arby’s restaurants segment
for sale-leaseback obligations and capitalized lease obligations, as well as the
operating leases, require or required periodic financial reporting of certain
subsidiary entities within ARG or of individual restaurants, which in many cases
have not been prepared or reported. The Company has negotiated waivers and
alternative covenants with its most significant lessors which substitute
consolidated financial reporting of ARG for that of individual subsidiary
entities and which modify restaurant level reporting requirements for more than
half of the affected leases. Nevertheless, as of January 3, 2010, 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.
Credit
Ratings
Wendy’s/Arby’s
Group, Inc. and its subsidiaries with specific debt issuances (Wendy’s/Arby’s
Restaurants and Wendy’s) are rated by Standard & Poor’s (“S&P”) and
Moody’s Investors Service (“Moody’s”).
The most
recent credit ratings, assigned in June 2009, for Wendy’s/Arby’s Group, Inc.,
Wendy’s/Arby’s Restaurants and the Wendy’s Notes were as follows:
|
S&P |
|
Moody's |
Corporate
family/corporate credit
|
|
|
|
Entity
|
Wendy’s/Arby’s
Group, Inc.
|
|
Wendy’s/Arby’s
Restaurants
|
Rating
|
B+
|
|
B2
|
Outlook
|
Negative
|
|
Stable
|
|
|
|
|
Wendy’s/Arby’s
Restaurants Senior Notes
|
B+
|
|
B2
|
|
|
|
|
Wendy’s/Arby’s
Restaurants Term Loan
|
BB
|
|
Ba2
|
|
|
|
|
Wendy’s
Notes
|
B-
|
|
Caa1
|
There are
many factors that could lead to future upgrades or downgrades of our credit
ratings. Credit rating upgrades or downgrades could lead to, among other things,
changes in borrowing costs and changes in our ability to access capital markets
on acceptable terms.
A rating
is not a recommendation to buy, sell or hold any security, and may be subject to
revision or withdrawal at any time by the rating agency. Each rating should be
evaluated independently of any other rating.
Contractual
Obligations
The
following table summarizes the expected payments under our outstanding
contractual obligations at January 3, 2010:
|
|
Fiscal
Years
|
|
|
|
2010
|
|
|
|
2011-2012 |
|
|
|
2013-2014 |
|
|
After
2014
|
|
|
Total
|
|
|
|
(in
millions)
|
|
Long-term
debt (a)
|
|
$ |
115.9 |
|
|
$ |
627.0 |
|
|
$ |
378.8 |
|
|
$ |
857.5 |
|
|
$ |
1,979.2 |
|
Sale-leaseback
obligations (b)
|
|
|
14.7 |
|
|
|
30.1 |
|
|
|
29.5 |
|
|
|
152.2 |
|
|
|
226.5 |
|
Capitalized
lease obligations (b)
|
|
|
17.7 |
|
|
|
27.1 |
|
|
|
24.2 |
|
|
|
110.4 |
|
|
|
179.4 |
|
Operating
leases (c)
|
|
|
146.7 |
|
|
|
261.5 |
|
|
|
225.8 |
|
|
|
1,125.2 |
|
|
|
1,759.2 |
|
Purchase
obligations (d)
|
|
|
51.5 |
|
|
|
62.0 |
|
|
|
60.1 |
|
|
|
106.6 |
|
|
|
280.2 |
|
Other
(e)
|
|
|
25.9 |
|
|
|
1.4 |
|
|
|
0.1 |
|
|
|
- |
|
|
|
27.4 |
|
Total
(f)
|
|
$ |
372.4 |
|
|
$ |
1,009.1 |
|
|
$ |
718.5 |
|
|
$ |
2,351.9 |
|
|
$ |
4,451.9 |
|
(a)
|
Excludes
sale-leaseback and capitalized lease obligations, which are shown
separately in the table. The table above includes interest of
approximately $611.1 million. We have estimated the interest on
our variable-rate debt based on current base rates, the current interest
rate margin and the amortization schedule in our Credit
Agreement. The table above also reflects the effect of interest
rate swaps entered into in 2009 which lowered our interest rate on certain
of our fixed-rate debt. These amounts exclude the effects of
the original issue discount on our Senior Notes and the fair value
adjustments related to certain debt assumed in the Wendy’s
Merger.
|
(b)
|
Excludes
related sublease rental receipts of $9.4 million on sale-leaseback
obligations and $3.5 million on capitalized lease
obligations. The table above includes interest of approximately
$101.3 million for sale-leaseback obligations and $89.5 million for
capitalized lease obligations.
|
(c)
|
Represents
the present value of minimum lease cash payments. Excludes
related sublease rental receipts of $76.1
million.
|
(d)
|
Includes
(1) $249.7 million remaining for beverage purchase requirements for
Wendy’s and Arby’s restaurants, (2) $2.0 million for advertising
commitments, (3) $18.6 million for capital expenditures and (4) $9.9
million of other purchase
obligations.
|
(e)
|
Represents
(1) $15.5 million for funding related to the Wendy’s Co-op Agreement, (2)
$6.1 million severance for Wendy’s and Wendy’s/Arby’s personnel in
connection with the Wendy’s Merger and New York headquarters’ employees
and (3) $5.8 million for stock repurchases in 2009 not settled until
2010.
|
(f)
|
Excludes
obligations for uncertain income tax positions of $31.0
million. We are unable to predict when, and if, cash payments
on any of this accrual will be
required.
|
Capital
Expenditures
In 2009,
cash capital expenditures amounted to $101.9 million and non-cash capital
expenditures, consisting of capitalized leases and certain sale-leaseback
obligations, amounted to $6.4 million. In 2010, we expect that cash
capital expenditures will amount to approximately $165.0 million, principally
relating to (1) remodeling approximately 100 Arby’s and 100 Wendy’s
Company-owned restaurants, (2) ongoing maintenance capital expenditures for our
Company-owned restaurants and (3) the opening of an estimated 12 new Wendy’s
Company-owned restaurants. We have $18.6 million of outstanding
commitments for capital expenditures as of January 3, 2010, of which we expect
$14.0 million to be paid in 2010.
Dividends
On March
30, 2009, June 15, 2009, September 15, 2009 and December 15, 2009, we paid
quarterly cash dividends of $0.015 per share on our Common Stock, aggregating
$28.0 million. During the 2010 first quarter, we declared dividends of $0.015
per share to be paid on March 15, 2010 to shareholders of record as of March 1,
2010. If we pay regular quarterly cash dividends for the remainder of
2010 at the same rate as declared in our 2010 first quarter, our total cash
requirement for dividends for all of 2010 would be approximately $26.6 million
based on the number of shares of our Common Stock outstanding at February 26,
2010. 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.
Stock
Repurchases
As
approved by our Board of Directors, our management is currently authorized, when
and if market conditions warrant and to the extent legally permissible, to
repurchase through January 2, 2011 up to a total of $200.0 million of our Common
Stock. As of January 3, 2010, we had repurchased 16.9 million shares with an
aggregate purchase price of $78.4 million, excluding commissions of $0.3 million
and including $5.8 million of repurchases that were not settled until after year
end. Since that date and through February 26, 2010, we repurchased an additional
9.1 million shares for an aggregate purchase price of $41.8 million, excluding
commissions of $0.2 million and excluding the repurchases that were not settled
until after the 2009 year end.
Income
Taxes
The
Wendy’s Merger qualified as a tax-free reorganization. Based on the
merger exchange ratio, the former shareholders of Wendy’s owned 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, for U.S.
Federal tax purposes there was an ownership change which places a limit on the
amount of a company’s net operating losses that can be deducted
annually.
The
Internal Revenue Service (the “IRS”) is currently conducting an examination of
our 2010 and 2009 U.S. Federal income tax years as part of the Compliance
Assurance Process (“CAP”). As part of CAP, tax years are audited on a
contemporaneous basis so that all or most issues are resolved prior to the
filing of the tax return. Wendy’s has been participating in CAP since
its 2006 tax year. The Wendy’s federal income tax returns for 2007
and prior years have been settled. The Company participated in CAP
beginning with the tax period ended December 28, 2008 and this return is
settled. Our December 28, 2008 U.S. Federal income tax return
included 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 2005 to September 29, 2008 are not currently
under examination by the IRS. However, some of Wendy’s/Arby’s state
income tax returns and some of the Wendy’s state income tax returns for periods
prior to the Wendy’s Merger are currently under examination. Certain
of these states have issued notices of proposed tax assessments aggregating $4.3
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.
Guarantees
and Other Contingencies
|
|
As
of January 3, 2010
|
|
|
|
(in
millions)
|
|
Lease
guarantees and contingent rent on leases (1)
|
|
$ |
108.6 |
|
Loan
guarantees (2)
|
|
$ |
25.8 |
|
Letters
of credit (3)
|
|
$ |
34.7 |
|
____________________
|
(1)
|
Wendy’s
is contingently liable for certain leases and other obligations primarily
from Company-owned restaurant locations now operated by franchises
amounting to $81.9 million as of January 3, 2010. These leases extend
through 2030, including all existing extension or renewal option periods.
In addition, Wendy’s is contingently liable for certain leases which have
been assigned to unrelated third parties, who have indemnified Wendy’s
against future liabilities arising under the leases of $12.2 million.
These leases expire on various dates through 2022, including all existing
extension or renewal option periods. RTM, one of our subsidiaries,
guarantees the lease obligations of 10 RTM restaurants formerly operated
by affiliates of RTM as of January 3, 2010 (the “Affiliate Lease
Guarantees”). Certain former stockholders of RTM have indemnified us with
respect to the Affiliate Lease Guarantees. In addition, RTM remains
contingently liable for 12 leases for restaurants sold by RTM prior to the
acquisition of RTM in 2005 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 $14.5 million as of January 3,
2010.
|
|
(2)
|
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.
|
|
(3)
|
Wendy’s/Arby’s,
Wendy’s/Arby’s Restaurants and Wendy’s have outstanding letters of credit
of $0.8 million, $33.6 million and $0.3 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.
|
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, of 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.
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.
Critical
Accounting Policies and Estimates
The
preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
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 other long-lived
assets, uncertainties for Federal and state income tax, allowance for doubtful
accounts, 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:
The
Company operates in two business segments consisting of 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. As of January 3, 2010, substantially all Wendy’s goodwill
of $863.4 million relates 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 using a two-step process.
Under the first step, the fair value of the reporting unit is compared with its
carrying value (including goodwill). If the fair value of the
reporting unit is less than its carrying value, an indication of goodwill
impairment exists for the reporting unit and we must perform step two of the
impairment test (measurement). Step two of the impairment test, if
necessary, requires the estimation of the fair value for the assets and
liabilities of a reporting unit in order to calculate the implied fair value of
the reporting unit’s goodwill. Under step two, an impairment loss is
recognized to the extent the carrying amount of the reporting unit’s goodwill
exceeds the implied fair value of goodwill. The fair value of the
reporting unit is determined by management and is based on the results of (1)
estimates we made regarding the present value of the anticipated cash flows
associated with each reporting unit (the “income approach”) and (2) the
indicated value of the reporting units based on a comparison and correlation of
the Company and other similar companies (the “market approach”).
The
income approach which, considers factors unique to each of our reporting units
and related long range plans that may not be comparable to other companies and
that are not yet publicly available, is dependent on several critical management
assumptions. These assumptions include estimates of future sales
growth, gross margins, operating costs, income tax rates, terminal value growth
rates, capital expenditures and the weighted average cost of capital (discount
rate). Anticipated cash flows used under the income approach are
developed every fourth quarter in conjunction with our annual budgeting process
and also incorporate amounts and timing of future cash flows based on our long
range plan.
The
discount rates used in the income approach are an estimate of the rate of return
that a market participant would expect of each reporting unit. To
select an appropriate rate for discounting the future earnings stream, a review
was made of short-term interest rate yields of long-term corporate and
government bonds, as well as the typical capital structure of companies in the
industry. The discount rates used for each reporting unit may vary
depending on the risk inherent in the cash flow projections, as well as the risk
level that would be perceived by a market participant. A terminal
value is included at the end of the projection period used in our discounted
cash flow analyses to reflect the remaining value that each reporting unit is
expected to generate. The terminal value represents the present value
in the last year of the projection period of all subsequent cash flows into
perpetuity. The terminal value growth rate is a key assumption used
in determining the terminal value as it represents the annual growth
of all subsequent cash flows into perpetuity
Under the
market approach, we apply the guideline company method in estimating fair
value. The guideline company method makes use of market price data of
corporations whose stock is actively traded in a public market. The
corporations we selected as guideline companies are engaged in a similar line of
business or are subject to similar financial and business risks, including the
opportunity for growth. The guideline company method of the market
approach provides an indication of value by relating the equity or invested
capital (debt plus equity) of guideline companies to various measures of their
earnings and cash flow, then applying such multiples to the business being
valued. The result of applying the guideline company approach is
adjusted based on the incremental value associated with a controlling interest
in the business. This “control premium” represents the amount a new
controlling shareholder would pay for the benefits resulting from synergies and
other potential benefits derived from controlling the enterprise.
The
estimated fair value of our reporting units 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 use, we may be required to recognize goodwill impairment charges in future
years.
We
performed our annual goodwill impairment test in the fourth quarter of 2009. As
a result of our testing, we concluded that the fair value of each of the Wendy’s
reporting units and Arby’s franchise restaurant reporting unit exceeded their
carrying amounts.
|
·
|
Impairment
of other long-lived assets:
|
Other
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
January 3, 2010, the net carrying value of Wendy’s restaurant segment long-lived
assets and intangible assets were $1,177.5 million and $1,342.9 million (which
includes $903.0 million associated with Wendy’s non-amortizing trademarks),
respectively, and Arby’s restaurant segment long-lived assets and intangible
assets were $419.8 million and $32.0 million, respectively.
We review
long-lived and amortizing intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. We assess the recoverability of property and
equipment and finite-lived other intangible assets by comparing the carrying
amount of the asset to future undiscounted net cash flows expected to be
generated by the asset. If the carrying amount of the long-lived
asset is not recoverable in full on an undiscounted cash flow basis, and
impairment is recognized to the extent that the carrying amount exceeds its fair
value and is included in “Impairment of the other long-lived
assets.” 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.
Non-amortizing
intangible assets are tested for impairment at least 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 the determination of the fair
value of the non-amortizing intangible assets include the anticipated future
sales of Company-owned and franchised restaurants and the resulting cash
flows.
Arby’s
restaurants impairment losses reflect impairment charges resulting from the
deterioration in operating performance of certain Company-owned restaurants in
2009, 2008 and 2007. Wendy’s restaurants impairment losses also reflect
impairment charges resulting from the same factors in 2009. 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.
|
·
|
Federal
and state income tax uncertainties:
|
We
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 this approach, at January 1, 2007 we
recognized an increase in our 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 $31.0 million and $30.3 million, which if resolved favorably would reduce the
Company’s tax expense by $21.8 million and $22.2 million, at January 3, 2010 and
December 28, 2008, respectively.
We
recognize interest accrued related to uncertain tax positions in “Interest
expense” and penalties in “General and administrative expenses.” At
January 3, 2010 and December 28, 2008 we had $4.3 million and $6.2 million
accrued for interest and $1.0 million and $1.9 million accrued for penalties,
both respectively.
As
discussed above in “Liquidity and Capital Resources,” our 2010 and 2009 U.S.
Federal income tax years are under examination as part of CAP. Our
U.S. Federal income tax returns for 2005 to 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.
|
·
|
Allowance
for doubtful accounts
|
Accounts
and notes receivable consist primarily of royalty and franchise fee receivables,
credit card receivables and rent. Notes receivable (non-current) consist of the
DFR Notes and notes receivable for franchisee obligations.
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. These factors, in turn,
could result in increases in its borrowing costs, reductions in its liquidity
and reductions
in the
value of DFR’s investments in its portfolio, all of which could reduce their
cash flows and could result in an increase to the current allowance for doubtful
accounts on DFR Notes of $21.2 million.
The need
for an allowance for doubtful accounts on franchise obligations is reviewed on a
specific franchisee basis based upon past due balances and the financial
strength of the franchisee. If average sales or the financial health of
franchisees were to deteriorate, it could result in an increase to the allowance
for doubtful accounts related to franchise receivables. In 2009, Arby’s
franchisee related accounts receivable and notes receivable and estimated
reserves for uncollectibility have increased significantly, and may continue to
increase, as a result of the deteriorating financial condition of some of our
franchisees. For the year ended January 3, 2010, we recorded $8.2
million in provision for doubtful accounts of which $7.4 million related to the
Arby’s franchises.
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 based on lease
terms. 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. 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.
Favorable
and unfavorable lease amounts are recorded as components of “Other intangible
assets” and “Other liabilities”, respectively, when we purchase restaurants and
are amortized to “Cost of sales” – both on a straight-line basis over the
remaining term of the leases. When the expected term of a lease,
including early terminations, is determined to be shorter than the original
amortization period, the favorable or unfavorable lease balance associated with
the lease is adjusted to reflect the revised lease term and a gain or loss
recognized.
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, market rents, property lives,
discount rates, and probable term, all of which can impact (1) the
classification and accounting for a lease as capital or operating, (2) the rent
holiday and/or escalations in payment that are taken into consideration when
calculating straight-line rent, (3) the term over which leasehold improvements
for each restaurant are amortized and (4) the values and lives of favorable and
unfavorable leases. 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.
Recently
Issued Accounting Pronouncements Not Yet Adopted
In June
2009, the Financial Accounting Standards Board (the “FASB”) issued guidelines on
the consolidation of variable interest entities which alters how a company
determines when an entity that is insufficiently capitalized or not controlled
through voting interests should be consolidated. A company has to determine
whether it should provide consolidated reporting of an entity based upon the
entity's purpose and design and the parent company's ability to direct the
entity's actions. The guidance is effective commencing with our 2010 fiscal
year. We do not expect adoption of this guidance to have a material impact on
our consolidated financial statements.
In
January 2010, the FASB issued amendments to the existing fair value measurements
and disclosures guidance which requires new disclosures and clarifies existing
disclosure requirements. The purpose of these amendments is to
provide a greater level of disaggregated information as well as more disclosure
around valuation techniques and inputs to fair value
measurements. The guidance is effective commencing with our 2010
fiscal year. We do not expect adoption of this standard to have a
material effect on our consolidated financial statements.
Item
7A. Quantitativeand 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 the
impact on our earnings and cash flows. Our policy is to maintain a target, over
time and subject to market conditions, of between 50% and 75% of “Long-term
debt” as fixed rate debt. As of January 3, 2010 our long-term debt, including
current portion and excluding the effect of interest rate swaps discussed below,
aggregated $1,522.9 million and consisted of $1,056.3 million of fixed-rate
debt, $251.5 million of variable-rate debt, and $215.1 million of capitalized
lease and sale-leaseback obligations. Our variable interest rate debt consists
of term loan borrowings under a variable-rate senior secured term loan facility
due through 2012 (the “Credit Agreement”). The term loan borrowings under the
Credit Agreement and amounts borrowed under the revolving credit facility
included in the Credit Agreement bear interest at the borrowers’ option at
either (1) LIBOR (0.25% at January 3, 2010) of not less than 2.75% plus an
interest rate margin of 4.5% or (2) the higher of a base rate determined by the
administrative agent for the Credit Agreement or the Federal funds rate plus
0.5% (but not less than 3.75%), in either case plus an interest rate margin of
3.5%. The Base Rate option was chosen as of January 3, 2010 with a resulting
7.25% interest rate. Consistent with our policy, we entered into several
outstanding interest rate swap agreements (the “Interest Rate Swaps”) during the
third quarter of 2009 with notional amounts totaling $361.0 million that swap
the fixed rate interest rates on our 6.20% and 6.25% Wendy’s senior notes for
floating rates. The Interest Rate Swaps are accounted for as fair value hedges
and qualify for the short-cut method under the applicable
guidance. At January 3, 2010, the fair value of our Interest Rate
Swaps was $1.6 million and was included in “Deferred costs and other assets” and
as an adjustment to the carrying amount of the 6.20% and 6.25% Wendy’s Senior
Notes. Our policies prohibit the use of derivative instruments for trading
purposes, and we have procedures in place to monitor and control their use. If
any portion of the hedge is determined to be ineffective, any changes in fair
value would be recognized in our results of operations.
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.
During
2009, Wendy’s employed various purchasing and pricing contract techniques in an
effort to minimize volatility. Generally these techniques included 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”).” In 2010,
Wendy’s, along with our franchisees, became members of a purchasing cooperative
established in the fourth quarter of 2009 that negotiates contracts with
approved suppliers on behalf of the Wendy's system in order to ensure favorable
pricing for its major food products, as well as maintain an adequate supply of
fresh food products. The purchasing contracts which established 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, were transferred to the purchasing cooperative in January
2010.
Equity
Market Risk
Our
objective in managing our exposure to changes in the market value of our
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.
Foreign
Currency Risk
Our
primary exposures to foreign currency risk are primarily related to fluctuations
in the Canadian dollar relative to the U.S. dollar for our 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 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 Canadian subsidiary exposures relate
to its restaurants and administrative operations. 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 January 3, 2010 represented 9% of our total
franchise revenues and 7% of our total revenues. For the year ended December 28,
2008, the same percentages were 7% and 3%, respectively. Accordingly, an
immediate 10% change in foreign currency exchange rates versus the United States
dollar from their levels at January 3, 2010 and December 28, 2008 would not have
a material effect on our consolidated financial position or results of
operations.
Credit
Risk
Our
credit risk as of January 3, 2010 includes the DFR Notes, which we received in
late fiscal 2007 in connection with the sale of our majority capital interest in
Deerfield.
In 2007,
the Company received, as a part of the proceeds of the Deerfield Sale, $48.0
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 (0.25% at January 3, 2010) 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.
Due to
the significant weakness in the credit markets in 2008 and at DFR 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 in
2008. The DFR Notes, net of unamortized discount and the valuation allowance, of
$25.7 million and $25.3 million at January 3, 2010 and December 28, 2008,
respectively, are included in non-current “Notes receivable.”
Overall
Market Risk
Our
overall market risk as of January 3, 2010 includes cash equivalents, certain
cost investments and our equity investment in TimWen. As of January 3, 2010 and
December 28, 2008, these investments were classified in our consolidated balance
sheets as follows (in millions):
|
|
Year
End
|
|
|
|
2009
|
|
|
2008
|
|
Cash
equivalents included in “Cash and cash equivalents”
|
|
$ |
238.4 |
|
|
$ |
36.8 |
|
Current
restricted cash equivalents
|
|
|
1.1 |
|
|
|
20.8 |
|
Investment
related receivables included in “Accounts and notes
receivable”
|
|
|
0.1 |
|
|
|
- |
|
Short-term
investments included in “Prepaid expenses and other current
assets”
|
|
|
0.3 |
|
|
|
0.2 |
|
Non-current
restricted cash equivalents
|
|
|
6.3 |
|
|
|
34.0 |
|
Non-current
investments
|
|
|
107.0 |
|
|
|
133.0 |
|
Investment
related receivables included in “Deferred costs and other
assets”
|
|
|
- |
|
|
|
0.4 |
|
|
|
$ |
353.2 |
|
|
$ |
225.2 |
|
Certain
liability positions related to investments included in “Other
liabilities”:
|
|
|
|
|
|
|
|
|
Derivatives
in liability positions
|
|
$ |
- |
|
|
$ |
(3.0 |
) |
Securities
sold with an obligation to purchase
|
|
|
- |
|
|
|
(16.6 |
) |
|
|
$ |
- |
|
|
$ |
(19.6 |
) |
Equities
Account
Prior to
2007, we invested $75.0 million in the Equities Account, which was managed by
the Management Company. The Equities Account was invested principally
in equity securities, cash equivalents and equity derivatives of a limited
number of publicly-traded companies. In addition, the Equities Account sold
securities short and invested in market put options in order to lessen the
impact of significant market downturns.
In June
2009, we and the Management Company entered into the Withdrawal Agreement which
provided that we would be permitted to withdraw all amounts in the Early
Withdrawal effective no later than June 26, 2009. Prior to the Withdrawal
Agreement and as a result of an investment management agreement with the
Management Company which was terminated on June 26, 2009, we had not been
permitted to withdraw any amounts from the Equities Account until December 31,
2010, although $47.0 million was released from the Equities Account in 2008
subject to an obligation to return that amount to the Equities Account by a
specified date. In consideration for obtaining such Early Withdrawal
right, we agreed to pay the Management Company $5.5 million, were not required
to return the $47.0 million referred to above and were no longer obligated to
pay investment management and incentive fees to the Management Company. The
Equities Account investments were liquidated in the Equities Sale, of which
$31.9 million was received by us, net of the Withdrawal Fee and for which we
realized a gain of $2.3 million in the 2009, both included in “Investment
expense (income), net.”
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, $7.4 million of which
was restricted as of January 3, 2010.
At
January 3, 2010 our investments were classified in the following general types
or categories (in millions):
|
|
|
|
|
|
|
|
Carrying
Value
|
|
Type
|
|
At
Cost
|
|
|
At
Fair Value (a)
|
|
|
Amount
|
|
|
Percent
|
|
Cash
equivalents
|
|
$ |
238.4 |
|
|
$ |
238.4 |
|
|
$ |
238.4 |
|
|
|
67.5% |
|
Current
and non-current restricted cash equivalents
|
|
|
7.4 |
|
|
|
7.4 |
|
|
|
7.4 |
|
|
|
2.1% |
|
Investment
related receivables
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.0% |
|
Investment
accounted for as an available-for-sale security
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.1% |
|
Other
non-current investments accounted for at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
89.0 |
|
|
|
97.5 |
|
|
|
97.5 |
|
|
|
27.6% |
|
Cost
|
|
|
9.5 |
|
|
|
11.3 |
|
|
|
9.5 |
|
|
|
2.7% |
|
|
|
$ |
344.6 |
|
|
$ |
355.0 |
|
|
$ |
353.2 |
|
|
|
100.0% |
|
|
(a)
|
There
was no assurance at January 3, 2010 that we would have been able to sell
certain of these investments at these
amounts.
|
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% |
|
Current
and non-current restricted cash equivalents
|
|
|
54.8 |
|
|
|
54.8 |
|
|
|
54.8 |
|
|
|
24.3% |
|
Investment
related receivables
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
0.2% |
|
Investments
accounted for as available-for-sale securities
|
|
|
30.2 |
|
|
|
30.4 |
|
|
|
30.4 |
|
|
|
13.5% |
|
Other
non-current investments accounted for at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
88.0 |
|
|
|
90.0 |
|
|
|
90.0 |
|
|
|
40.0% |
|
Cost
|
|
|
12.8 |
|
|
|
12.8 |
|
|
|
12.8 |
|
|
|
5.7% |
|
|
|
$ |
223.0 |
|
|
$ |
225.2 |
|
|
$ |
225.2 |
|
|
|
100.0% |
|
Liability
positions related to investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
sold with an obligation to purchase |
|
|
(19.8) |
|
|
|
(16.6) |
|
|
|
(16.6) |
|
|
|
84.7% |
|
Non-current
derivatives in liability positions |
|
|
- |
|
|
|
(3.0) |
|
|
|
(3.0) |
|
|
|
15.3% |
|
|
|
$ |
(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,
described above.
|
Our
investments which are accounted for at cost included limited partnerships and
other non-current investments in which we do not have significant influence over
the investees. Realized gains and losses on our investments recorded at cost are
reported as income or loss in the period in which the securities are sold.
Investments accounted for in accordance with the equity method of accounting are
those in which we have significant influence over the investees and for which
our results of operations include our share of the income or loss of the
investees. We review all of our investments in which we have unrealized losses
and recognize investment losses currently for any unrealized losses we deem to
be other than temporary.
Sensitivity
Analysis
Our
estimate of market risk exposure is presented for each class of financial
instruments held by us at January 3, 2010 and December 28, 2008 for which an
immediate adverse market movement would cause a potential material impact on our
financial position or results of operations. We believe that the adverse market
movements described below represent the hypothetical loss to our financial
position or our results of operations and do not represent the maximum possible
loss nor any expected actual loss, even under adverse conditions, because actual
adverse fluctuations would likely differ. As of January 3, 2010, 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 as of January 3, 2010 and December 28, 2008
based upon assumed immediate adverse effects as noted below (in
millions):
|
|
Year
End 2009
|
|
|
|
Carrying
Value
|
|
|
Interest
Rate Risk
|
|
|
Equity
Price Risk
|
|
|
Foreign
Currency Risk
|
|
Cash
equivalents
|
|
$ |
238.4 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Current
and non-current restricted cash equivalents
|
|
|
7.4 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Available-for-sale
equity security
|
|
|
0.3 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Interest
Rate Swaps
|
|
|
1.6 |
|
|
|
(5.6 |
) |
|
|
- |
|
|
|
- |
|
Equity
investment
|
|
|
97.5 |
|
|
|
- |
|
|
|
(9.8 |
) |
|
|
(9.8 |
) |
Cost
investments
|
|
|
9.5 |
|
|
|
(0.1 |
) |
|
|
(0.8 |
) |
|
|
- |
|
DFR
Notes
|
|
|
25.7 |
|
|
|
(0.3 |
) |
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, excluding capitalized lease and sale-leaseback obligations-variable
rate
|
|
|
(251.5 |
) |
|
|
(5.3 |
) |
|
|
- |
|
|
|
- |
|
Long-term
debt, excluding capitalized lease and sale-leaseback obligations-fixed
rate
|
|
|
(1,056.3 |
) |
|
|
(36.7 |
) |
|
|
- |
|
|
|
- |
|
|
|
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
|
|
|
30.2 |
|
|
|
- |
|
|
|
(3.0 |
) |
|
|
- |
|
Equity
investments
|
|
|
90.0 |
|
|
|
- |
|
|
|
(9.0 |
) |
|
|
(9.0 |
) |
Cost
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
rate
|
|
|
(385.0 |
) |
|
|
(11.9 |
) |
|
|
- |
|
|
|
- |
|
Long-term
debt, excluding capitalized lease and sale-leaseback obligations-fixed
rate
|
|
|
(495.9 |
) |
|
|
(61.0 |
) |
|
|
- |
|
|
|
- |
|
The
sensitivity analysis of financial instruments held at January 3, 2010 and
December 28, 2008 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 January 3, 2010 and December 28, 2008, 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 “Cost investments” in the tables
above. The sensitivity analysis also assumes that the decreases in
the equity markets and foreign exchange rates are other than
temporary. 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 $238.4 million and $7.4
million, respectively, as of January 3, 2010 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 January 3, 2010, we had amounts of both fixed-rate debt and variable-rate
debt. On the fixed-rate debt, the interest rate risk presented with respect to
our long-term debt, excluding capitalized lease and sale-leaseback obligations,
primarily relates to the potential impact a decrease in interest rates of one
percentage point has on the fair value of our $1,056.3 million of fixed-rate
debt and not on our financial position or our results of operations. However, as
discussed above under “Interest Rate Risk,” we have interest rate swap
agreements on a portion of our fixed-rate debt. The interest rate
risk of our fixed-rate debt presented in the tables above exclude the effect of
the $361.0 million for which we designated interest rate swap agreements as fair
value hedges for the terms of the swap agreements. As interest rates
decrease, the fair market values of the interest rate swap agreements
increase. The interest rate risks presented with respect to the
interest rate swap agreements represent the potential impact the indicated
change has on our results of operations. On the variable-rate debt, the interest
rate risk presented with respect to our long-term debt, excluding capitalized
lease and sale-leaseback obligations, represents the potential impact an
increase in interest rates of one percentage point has on our results of
operations related to our $251.5 million of variable-rate long-term debt
outstanding as of January 3, 2010. Our variable-rate long-term debt outstanding
as of January 3, 2010 had a weighted average remaining maturity of approximately
two years.
Item 8. Financial
Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
61
|
|
63
|
|
64
|
|
65
|
|
66
|
|
69
|
|
71
|
|
71
|
|
76
|
|
79
|
|
80
|
|
81
|
|
83
|
|
87
|
|
88
|
|
90
|
|
92
|
|
94
|
|
94
|
|
97
|
|
102
|
|
105
|
|
105
|
|
106
|
|
106
|
|
106
|
|
107
|
|
108
|
|
110
|
|
115
|
|
115
|
|
115
|
|
120
|
|
Footnote Where Defined
|
2007
Trusts
|
(14)
|
Facilities
Relocation and Corporate Restructuring
|
401(k)
Plans
|
(19)
|
Retirement
Benefit Plans
|
Advertising
Funds
|
(24)
|
Advertising
Costs and Funds
|
AFA
|
(8)
|
Long-Term
Debt
|
Affiliate
Lease Guarantees
|
(21)
|
Guarantees
and Other Commitments and Contingencies
|
Amended
Revolver
|
(8)
|
Long-Term
Debt
|
Aircraft
Lease Agreement
|
(22)
|
Transactions
with Related Parties
|
Amended
Term Loan
|
(8)
|
Long-Term
Debt
|
Arby's
|
(1)
|
Summary
of Significant Accounting Policies
|
ARG
|
(1)
|
Summary
of Significant Accounting Policies
|
As
Adjusted
|
(2)
|
Acquisitions
and Dispositions
|
Asset
Management
|
(25)
|
Business
Segments
|
Bakery
|
(19)
|
Retirement
Benefit Plans
|
Black-Scholes
Model
|
(1)
|
Summary
of Significant Accounting Policies
|
California
Restaurant Acquisition
|
(2)
|
Acquisitions
and Dispositions
|
CAP
|
(11)
|
Income
Taxes
|
Capitalized
Lease Obligations
|
(8)
|
Long-Term
Debt
|
Carrying
Value Difference
|
(1)
|
Summary
of Significant Accounting Policies
|
CDOs
|
(1)
|
Summary
of Significant Accounting Policies
|
Class
A Options
|
(13)
|
Share-Based
Compensation
|
Class
B Options
|
(13)
|
Share-Based
Compensation
|
Class
B Units
|
(13)
|
Share-Based
Compensation
|
Closing
Date
|
(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
|
(14)
|
Facilities
Relocation and Corporate Restructuring
|
Conversion
|
(2)
|
Acquisitions
and Dispositions
|
Convertible
Notes
|
(4)
|
Income
(Loss) Per Share
|
Co-op
Agreement
|
(22)
|
Transactions
with Related Parties
|
Corporate
Restructuring
|
(14)
|
Facilities
Relocation and Corporate Restructuring
|
Cost
Method
|
(1)
|
Summary
of Significant Accounting Policies
|
Credit
Agreement
|
(8)
|
Long-Term
Debt
|
Debentures
|
(8)
|
Long-Term
Debt
|
Deerfield
|
(1)
|
Summary
of Significant Accounting Policies
|
Deerfield
Executive
|
(22)
|
Transactions
with Related Parties
|
Deerfield
Executives
|
(22)
|
Transactions
with Related Parties
|
Deerfield
Sale
|
(1)
|
Summary
of Significant Accounting Policies
|
Deerfield
Severance Agreement
|
(22)
|
Transactions
with Related Parties
|
Deferred
Compensation Trusts
|
(22)
|
Transactions
with Related Parties
|
Determination
Date
|
(2)
|
Acquisitions
and Dispositions
|
DFR
|
(1)
|
Summary
of Significant Accounting Policies
|
DFR
Notes
|
(1)
|
Summary
of Significant Accounting Policies
|
DFR
Restricted Shares
|
(2)
|
Acquisitions
and Dispositions
|
DFR
Stock Purchasers
|
(2)
|
Acquisitions
and Dispositions
|
Early
Withdrawal
|
(6)
|
Investments
|
Equipment
Term Loan
|
(8)
|
Long-Term
Debt
|
Equities
Account
|
(6)
|
Investments
|
Equity
Interests
|
(13)
|
Share-Based
Compensation
|
Equity
Investments
|
(1)
|
Summary
of Significant Accounting Policies
|
Equities
Sale
|
(6)
|
Investments
|
Equity
Funds
|
(22)
|
Transactions
with Related Parties
|
Equity
Plans
|
(13)
|
Share-Based
Compensation
|
FASB
|
(1)
|
Summary
of Significant Accounting Policies
|
Former
Executives
|
(14)
|
Facilities
Relocation and Corporate Restructuring
|
Foundation
|
(22)
|
Transactions
with Related Parties
|
Funds
|
(1)
|
Summary
of Significant Accounting Policies
|
GAAP
|
(1)
|
Summary
of Significant Accounting Policies
|
Guarantors
|
(8)
|
Long-Term
Debt
|
Helicopter
Interests
|
(22)
|
Transactions
with Related Parties
|
Indenture
|
(8)
|
Long-Term
Debt
|
Interest
Rate Swaps
|
(8)
|
Long-Term
Debt
|
IRS
|
(11)
|
Income
Taxes
|
Jurlique
|
(6)
|
Investments
|
Legacy
Assets
|
(6)
|
Investments
|
Liquidation
Services Agreement
|
(6)
|
Investments
|
LIBOR
|
(3)
|
DFR
Notes
|
Management
Company
|
(2)
|
Acquisitions
and Dispositions
|
Management
Company Employees
|
(22)
|
Transactions
with Related Parties
|
New
Services Agreement
|
(22)
|
Transactions
with Related Parties
|
Other
Than Temporary Losses
|
(1)
|
Summary
of Significant Accounting Policies
|
Package
Options
|
(13)
|
Share-Based
Compensation
|
Payment
Obligations
|
(14)
|
Facilities
Relocation and Corporate Restructuring
|
Preferred
Stock
|
(2)
|
Acquisitions
and Dispositions
|
Principals
|
(22)
|
Transactions
with Related Parties
|
Profit
Interests
|
(13)
|
Share-Based
Compensation
|
QSCC
|
(22)
|
Transactions
with Related Parties
|
Rent
Holiday
|
(1)
|
Summary
of Significant Accounting Policies
|
RSAs
|
(13)
|
Share-Based
Compensations
|
RSUs
|
(13)
|
Share-Based
Compensations
|
RTM
|
(14)
|
Facilities
Relocation and Corporate Restructuring
|
RTM
Acquisition
|
(21)
|
Guarantees
and Other Commitments and Contingencies
|
Sale-Leaseback
Obligations
|
(8)
|
Long-Term
Debt
|
Senior
Notes
|
(8)
|
Long-Term
Debt
|
Separation
Date
|
(14)
|
Facilities
Relocation and Corporate Restructuring
|
SERP
|
(19)
|
Retirement
Benefit Plans
|
Services
Agreement
|
(2)
|
Acquisitions
and Dispositions
|
Special
Committee
|
(22)
|
Transactions
with Related Parties
|
Straight-Line
Rent
|
(1)
|
Summary
of Significant Accounting Policies
|
Subleases
|
(22)
|
Transactions
with Related Parties
|
Syrup
|
(21)
|
Guarantees
and Other Commitments and Contingencies
|
Target
Amount
|
(6)
|
Investments
|
TASCO
|
(22)
|
Transactions
with Related Parties
|
TDH
|
(1)
|
Summary
of Significant Accounting Policies
|
Term
Loan Swap Agreement
|
(9)
|
Derivative
Instruments
|
THI
|
(1)
|
Summary
of Significant Accounting Policies
|
TimWen
|
(1)
|
Summary
of Significant Accounting Policies
|
Triarc
|
(1)
|
Summary
of Significant Accounting Policies
|
Trustee
|
(8)
|
Long-Term
Debt
|
Uncertain
Tax Positions
|
(1)
|
Summary
of Significant Accounting Policies
|
Union
Pension Fund
|
(19)
|
Retirement
Benefit Plans
|
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/Arby’s
Restaurants
|
(1)
|
Summary
of Significant Accounting Policies
|
Wendy’s
Merger
|
(1)
|
Summary
of Significant Accounting Policies
|
Wendy’s
Plans
|
(13)
|
Share-Based
Compensation
|
Wendy’s
Pension Plans
|
(19)
|
Retirement
Benefit Plans
|
Wendy’s
Revolver
|
(8)
|
Long-Term
Debt
|
Withdrawal
Agreement
|
(6)
|
Investments
|
Withdrawal
Fee
|
(6)
|
Investments
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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. and subsidiaries (the “Company”) as of January 3, 2010 and December 28,
2008, and the related consolidated statements of operations, stockholders’
equity, and cash flows for each of the three years in the period ended January
3, 2010. Our audits also included the financial statement schedule
listed in the Index at Item 15. These financial statements and
financial statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule 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 January 3, 2010 and
December 28, 2008, and the results of its operations and its cash flows for each
of the three years in the period ended January 3, 2010, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.
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 January 3, 2010, 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 3, 2010 expressed an unqualified
opinion on the Company’s internal control over financial reporting.
/s/
Deloitte & Touche LLP
Atlanta,
Georgia
March 3,
2010
Item
8. Financial Statements and
Supplementary Data
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(In
Thousands)
|
|
January
3,
|
|
|
December
28,
|
|
|
|
2010
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
591,719 |
|
|
$ |
90,090 |
|
Restricted
cash equivalents
|
|
|
1,114 |
|
|
|
20,792 |
|
Accounts
and notes receivable
|
|
|
88,004 |
|
|
|
97,258 |
|
Inventories
|
|
|
23,024 |
|
|
|
24,646 |
|
Prepaid
expenses and other current assets
|
|
|
28,098 |
|
|
|
28,990 |
|
Deferred
income tax benefit
|
|
|
66,557 |
|
|
|
37,923 |
|
Advertising
funds restricted assets
|
|
|
80,476 |
|
|
|
81,139 |
|
Total
current assets
|
|
|
878,992 |
|
|
|
380,838 |
|
Restricted
cash equivalents
|
|
|
6,242 |
|
|
|
34,032 |
|
Notes
receivable
|
|
|
39,295 |
|
|
|
34,608 |
|
Investments
|
|
|
107,020 |
|
|
|
133,052 |
|
Properties
|
|
|
1,619,248 |
|
|
|
1,770,372 |
|
Goodwill
|
|
|
881,019 |
|
|
|
853,775 |
|
Other
intangible assets
|
|
|
1,392,883 |
|
|
|
1,411,473 |
|
Deferred
costs and other assets
|
|
|
50,717 |
|
|
|
27,470 |
|
Total
assets
|
|
$ |
4,975,416 |
|
|
$ |
4,645,620 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
22,127 |
|
|
$ |
30,426 |
|
Accounts
payable
|
|
|
103,454 |
|
|
|
139,340 |
|
Accrued
expenses and other current liabilities
|
|
|
269,090 |
|
|
|
251,584 |
|
Advertising
funds restricted liabilities
|
|
|
80,476 |
|
|
|
81,139 |
|
Total
current liabilities
|
|
|
475,147 |
|
|
|
502,489 |
|
Long-term
debt
|
|
|
1,500,784 |
|
|
|
1,081,151 |
|
Deferred
income
|
|
|
13,195 |
|
|
|
16,859 |
|
Deferred
income taxes
|
|
|
475,538 |
|
|
|
475,243 |
|
Other
liabilities
|
|
|
174,413 |
|
|
|
186,433 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $ 0.10 par value; 1,500,000 shares authorized;
470,424
shares issued
|
|
|
47,042 |
|
|
|
47,042 |
|
Additional
paid-in capital
|
|
|
2,761,433 |
|
|
|
2,753,141 |
|
Accumulated
deficit
|
|
|
(380,480 |
) |
|
|
(357,541 |
) |
Common
stock held in treasury, at cost
|
|
|
(85,971 |
) |
|
|
(15,944 |
) |
Accumulated
other comprehensive loss
|
|
|
(5,685 |
) |
|
|
(43,253 |
) |
Total
stockholders’ equity
|
|
|
2,336,339 |
|
|
|
2,383,445 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
4,975,416 |
|
|
$ |
4,645,620 |
|
See
accompanying notes to consolidated financial statements
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(In
Thousands Except Per Share Amounts)
|
|
Year
Ended
|
|
|
|
January
3,
|
|
|
December
28,
|
|
|
December
30,
|
|
|
|
2010
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
3,198,348 |
|
|
$ |
1,662,291 |
|
|
$ |
1,113,436 |
|
Franchise
revenues
|
|
|
382,487 |
|
|
|
160,470 |
|
|
|
86,981 |
|
Asset
management and related fees
|
|
|
- |
|
|
|
- |
|
|
|
63,300 |
|
|
|
|
3,580,835 |
|
|
|
1,822,761 |
|
|
|
1,263,717 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
2,728,484 |
|
|
|
1,415,534 |
|
|
|
894,450 |
|
Cost
of services
|
|
|
- |
|
|
|
- |
|
|
|
25,183 |
|
General
and administrative
|
|
|
452,713 |
|
|
|
248,718 |
|
|
|
205,375 |
|
Depreciation
and amortization
|
|
|
190,251 |
|
|
|
88,315 |
|
|
|
66,277 |
|
Goodwill
impairment
|
|
|
- |
|
|
|
460,075 |
|
|
|
- |
|
Impairment
of other long-lived assets
|
|
|
82,132 |
|
|
|
19,203 |
|
|
|
7,045 |
|
Facilities
relocation and corporate restructuring
|
|
|
11,024 |
|
|
|
3,913 |
|
|
|
85,417 |
|
Gain
on sale of consolidated business
|
|
|
- |
|
|
|
- |
|
|
|
(40,193 |
) |
Other
operating expense, net
|
|
|
4,255 |
|
|
|
653 |
|
|
|
263 |
|
|
|
|
3,468,859 |
|
|
|
2,236,411 |
|
|
|
1,243,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit (loss)
|
|
|
111,976 |
|
|
|
(413,650 |
) |
|
|
19,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(126,708 |
) |
|
|
(67,009 |
) |
|
|
(61,331 |
) |
Investment
(expense) income, net
|
|
|
(3,008 |
) |
|
|
9,438 |
|
|
|
62,110 |
|
Other
than temporary losses on investments
|
|
|
(3,916 |
) |
|
|
(112,741 |
) |
|
|
(9,909 |
) |
Other
income (expense), net
|
|
|
1,523 |
|
|
|
2,710 |
|
|
|
(4,038 |
) |
(Loss)
income from continuing operations before income taxes
|
|
|
(20,133 |
) |
|
|
(581,252 |
) |
|
|
6,732 |
|
Benefit
from income taxes
|
|
|
23,649 |
|
|
|
99,294 |
|
|
|
8,354 |
|
Income
(loss) from continuing operations
|
|
|
3,516 |
|
|
|
(481,958 |
) |
|
|
15,086 |
|
Income
from discontinued operations, net of income taxes
|
|
|
1,546 |
|
|
|
2,217 |
|
|
|
995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
5,062 |
|
|
$ |
(479,741 |
) |
|
$ |
16,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) per share :
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
$ |
.01 |
|
|
$ |
(3.06 |
) |
|
$ |
.15 |
|
Class
B common stock
|
|
|
N/A |
|
|
|
(1.26 |
) |
|
|
.17 |
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
$ |
- |
|
|
$ |
.01 |
|
|
$ |
.01 |
|
Class
B common stock
|
|
|
N/A |
|
|
|
.02 |
|
|
|
.01 |
|
Net
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
$ |
.01 |
|
|
$ |
(3.05 |
) |
|
$ |
.16 |
|
Class
B common stock
|
|
|
N/A |
|
|
|
(1.24 |
) |
|
|
.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
per share :
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
$ |
.06 |
|
|
$ |
.26 |
|
|
$ |
.32 |
|
Class
B common stock
|
|
|
N/A |
|
|
|
.26 |
|
|
|
.36 |
|
See
accompanying notes to consolidated financial statements.
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
|
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
Common
Stock
|
|
|
Additional
Paid-in Capital
|
|
|
Accumulated Deficit
|
|
|
Common
Stock Held
in Treasury
|
|
|
Unrealized
Gain on Available- for-Sale
Securities
|
|
|
Foreign
Currency Translation
Adjustment
|
|
|
Unrecognized
Pension Loss
|
|
|
Total
|
|
Balance
at December 28, 2008
|
|
$ |
47,042 |
|
|
$ |
2,753,141 |
|
|
$ |
(357,541 |
) |
|
$ |
(15,944 |
) |
|
$ |
108 |
|
|
$ |
(42,313 |
) |
|
$ |
(1,048 |
) |
|
$ |
2,383,445 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
5,062 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,062 |
|
Change
in unrealized gain on available-for-sale securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(49 |
) |
|
|
- |
|
|
|
- |
|
|
|
(49 |
) |
Foreign
currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
37,617 |
|
|
|
- |
|
|
|
37,617 |
|
Comprehensive
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
42,630 |
|
Cash
dividends
|
|
|
- |
|
|
|
- |
|
|
|
(27,976 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(27,976 |
) |
Accrued
dividends on nonvested restricted stock
|
|
|
- |
|
|
|
- |
|
|
|
(25 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(25 |
) |
Repurchases
of Common Stock
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(78,720 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(78,720 |
) |
Share-based
compensation expense
|
|
|
- |
|
|
|
15,294 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
15,294 |
|
Common
stock issued upon exercises of stock options
|
|
|
- |
|
|
|
(4,720 |
) |
|
|
- |
|
|
|
6,686 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,966 |
|
Restricted
common stock issued
|
|
|
- |
|
|
|
(1,777 |
) |
|
|
- |
|
|
|
1,777 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Non-controlling
interests, primarily distributions
|
|
|
- |
|
|
|
(129 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(129 |
) |
Other
|
|
|
- |
|
|
|
(376 |
) |
|
|
- |
|
|
|
230 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(146 |
) |
Balance
at January 3, 2010
|
|
$ |
47,042 |
|
|
$ |
2,761,433 |
|
|
$ |
(380,480 |
) |
|
$ |
(85,971 |
) |
|
$ |
59 |
|
|
$ |
(4,696 |
) |
|
$ |
(1,048 |
) |
|
$ |
2,336,339 |
|
See
accompanying notes to consolidated financial statements.
WENDY’S/ARBY’S
GROUP, IN C. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
Class
A Common Stock
|
|
|
Class
B Common Stock
|
|
|
Additional
Paid-in Capital
|
|
|
Retained
Earnings/ (Accumulated Deficit)
|
|
|
Common
Stock Held in
Treasury
|
|
|
Unrealized
(Loss) Gain on Available- for-Sale
Securities
|
|
|
Unrealized
Loss on Cash Flow Hedges
|
|
|
Foreign
Currency Translation
Adjustment
|
|
|
Unrecog-
nized Pension Loss
|
|
|
Total
|
|
Balance
at December 30 2007
|
|
$ |
2,955 |
|
|
$ |
6,402 |
|
|
$ |
292,080 |
|
|
$ |
167,267 |
|
|
$ |
(16,774 |
) |
|
$ |
(2,104 |
) |
|
$ |
(155 |
) |
|
$ |
689 |
|
|
$ |
(528 |
) |
|
$ |
449,832 |
|
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(479,741 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(479,741 |
) |
Change
in unrealized (loss) gain on available-for-sale securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,212 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,212 |
|
Change
in unrealized 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 |
|
Restricted
common stock issued
|
|
|
- |
|
|
|
1 |
|
|
|
(3,654 |
) |
|
|
- |
|
|
|
3,627 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(26 |
) |
Common
stock withheld as payment for withholding taxes on capital stock
transactions
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,989 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,989 |
) |
Non-controlling
interests, primarily distributions
|
|
|
- |
|
|
|
- |
|
|
|
(804 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(804 |
) |
Other
|
|
|
(1 |
) |
|
|
5 |
|
|
|
(577 |
) |
|
|
- |
|
|
|
132 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(441 |
) |
Balance
at December 28, 2008
|
|
$ |
47,042 |
|
|
$ |
- |
|
|
$ |
2,753,141 |
|
|
$ |
(357,541 |
) |
|
$ |
(15,944 |
) |
|
$ |
108 |
|
|
$ |
- |
|
|
$ |
(42,313 |
) |
|
$ |
(1,048 |
) |
|
$ |
2,383,445 |
|
See
accompanying notes to consolidated financial statements.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
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 |
|
|
$ |
325,834 |
|
|
$ |
185,726 |
|
|
$ |
(43,695 |
) |
|
$ |
13,353 |
|
|
$ |
2,237 |
|
|
$ |
(47 |
) |
|
$ |
(691 |
) |
|
$ |
492,038 |
|
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 |
|
|
|
325,834 |
|
|
|
183,451 |
|
|
|
(43,695 |
) |
|
|
13,353 |
|
|
|
2,237 |
|
|
|
(47 |
) |
|
|
(691 |
) |
|
|
489,763 |
|
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
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 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Restricted
common stock issued
|
|
|
- |
|
|
|
23 |
|
|
|
(8,005 |
) |
|
|
- |
|
|
|
7,982 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Common
stock withheld as payment for withholding taxes on capital stock
transactions
|
|
|
- |
|
|
|
(5 |
) |
|
|
(682 |
) |
|
|
- |
|
|
|
(4,108 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,795 |
) |
Non-controlling
interests, primarily distributions
|
|
|
- |
|
|
|
- |
|
|
|
(13,267 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(13,267 |
) |
Other
|
|
|
- |
|
|
|
- |
|
|
|
(21,555 |
) |
|
|
- |
|
|
|
21,460 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(95 |
) |
Balance
at December 30, 2007
|
|
$ |
2,955 |
|
|
$ |
6,402 |
|
|
$ |
292,080 |
|
|
$ |
167,267 |
|
|
$ |
(16,774 |
) |
|
$ |
(2,104 |
) |
|
$ |
(155 |
) |
|
$ |
689 |
|
|
$ |
(528 |
) |
|
$ |
449,832 |
|
See
accompanying notes to consolidated financial statements
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
(In
Thousands)
|
|
Year
Ended
|
|
|
|
January
3,
|
|
|
December
28,
|
|
|
December
30,
|
|
|
|
2010
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from continuing operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
5,062 |
|
|
$ |
(479,741 |
) |
|
$ |
16,081 |
|
Adjustments
to reconcile net income (loss) to net cash provided by
continuing operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
190,251 |
|
|
|
88,315 |
|
|
|
66,277 |
|
Impairment
of other long-lived assets
|
|
|
82,132 |
|
|
|
19,203 |
|
|
|
7,045 |
|
Write-off
and amortization of deferred financing costs
|
|
|
15,820 |
|
|
|
8,885 |
|
|
|
2,038 |
|
Share-based
compensation provision
|
|
|
15,294 |
|
|
|
9,129 |
|
|
|
9,990 |
|
Distributions
received from joint venture
|
|
|
14,583 |
|
|
|
2,864 |
|
|
|
- |
|
Non-cash
rent expense
|
|
|
12,618 |
|
|
|
3,103 |
|
|
|
1,528 |
|
Accretion
of long-term debt
|
|
|
10,400 |
|
|
|
2,452 |
|
|
|
179 |
|
Provision
for doubtful accounts
|
|
|
8,169 |
|
|
|
670 |
|
|
|
631 |
|
Operating
investment adjustments, net (see below)
|
|
|
2,484 |
|
|
|
105,357 |
|
|
|
(33,525 |
) |
Deferred
income tax benefit, net
|
|
|
(40,127 |
) |
|
|
(105,276 |
) |
|
|
(10,777 |
) |
Equity
in earnings in joint venture
|
|
|
(8,499 |
) |
|
|
(1,974 |
) |
|
|
- |
|
Income
from discontinued operations
|
|
|
(1,546 |
) |
|
|
(2,217 |
) |
|
|
(995 |
) |
Net
receipt (recognition) of vendor incentive
|
|
|
(791 |
) |
|
|
(6,459 |
) |
|
|
(990 |
) |
Goodwill
impairment
|
|
|
- |
|
|
|
460,075 |
|
|
|
- |
|
Gain
on sale of consolidated business
|
|
|
- |
|
|
|
- |
|
|
|
(40,193 |
) |
Other,
net
|
|
|
(4,317 |
) |
|
|
(3,886 |
) |
|
|
47 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
and notes receivable
|
|
|
(6,074 |
) |
|
|
(4,187 |
) |
|
|
15,022 |
|
Inventories
|
|
|
1,879 |
|
|
|
(140 |
) |
|
|
(987 |
) |
Prepaid
expenses and other current assets
|
|
|
3,987 |
|
|
|
8,808 |
|
|
|
(3,123 |
) |
Accounts
payable, accrued expenses, and other current liabilities
|
|
|
(2,527 |
) |
|
|
(31,376 |
) |
|
|
(7,444 |
) |
Net
cash provided by continuing operating activities
|
|
|
298,798 |
|
|
|
73,605 |
|
|
|
20,804 |
|
Cash
flows from continuing investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(101,914 |
) |
|
|
(106,989 |
) |
|
|
(72,990 |
) |
Investment
activities, net (see below)
|
|
|
38,141 |
|
|
|
51,066 |
|
|
|
51,531 |
|
Proceeds
from dispositions
|
|
|
10,882 |
|
|
|
1,322 |
|
|
|
2,734 |
|
Cost
of acquisitions, less cash acquired
|
|
|
(2,357 |
) |
|
|
(9,622 |
) |
|
|
(4,094 |
) |
Increase
in cash from merger with Wendy’s International, Inc.
(‘Wendy’s”)
|
|
|
- |
|
|
|
199,785 |
|
|
|
- |
|
Cost
of merger with Wendy’s
|
|
|
(608 |
) |
|
|
(18,403 |
) |
|
|
(2,017 |
) |
Decrease
in cash related to the sale of a consolidated business
|
|
|
- |
|
|
|
- |
|
|
|
(15,104 |
) |
Other,
net
|
|
|
237 |
|
|
|
(228 |
) |
|
|
16 |
|
Net
cash (used in) provided by continuing investing activities
|
|
|
(55,619 |
) |
|
|
116,931 |
|
|
|
(39,924 |
) |
Cash
flows from continuing financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from long-term debt
|
|
|
607,507 |
|
|
|
37,753 |
|
|
|
23,060 |
|
Repayments
of notes payable and long-term debt
|
|
|
(210,371 |
) |
|
|
(177,883 |
) |
|
|
(24,505 |
) |
Repurchases
of common stock
|
|
|
(72,927 |
) |
|
|
- |
|
|
|
- |
|
Deferred
financing costs
|
|
|
(38,399 |
) |
|
|
- |
|
|
|
- |
|
Dividends
paid
|
|
|
(27,976 |
) |
|
|
(30,538 |
) |
|
|
(32,117 |
) |
Distributions
to non-controlling interests
|
|
|
(156 |
) |
|
|
(1,144 |
) |
|
|
(13,494 |
) |
Other,
net
|
|
|
1,715 |
|
|
|
(1,113 |
) |
|
|
(3,147 |
) |
Net
cash provided by (used in) continuing financing activities
|
|
|
259,393 |
|
|
|
(172,925 |
) |
|
|
(50,203 |
) |
Net
cash provided by (used in) continuing operations before effect of exchange
rate changes on cash
|
|
|
502,572 |
|
|
|
17,611 |
|
|
|
(69,323 |
) |
Effect
of exchange rate changes on cash
|
|
|
2,725 |
|
|
|
(4,123 |
) |
|
|
- |
|
Net
cash provided by (used in) continuing operations
|
|
|
505,297 |
|
|
|
13,488 |
|
|
|
(69,323 |
) |
Net
cash used in operating activities of discontinued
operations
|
|
|
(3,668 |
) |
|
|
(1,514 |
) |
|
|
(713 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
501,629 |
|
|
|
11,974 |
|
|
|
(70,036 |
) |
Cash
and cash equivalents at beginning of year
|
|
|
90,090 |
|
|
|
78,116 |
|
|
|
148,152 |
|
Cash
and cash equivalents at end of year
|
|
$ |
591,719 |
|
|
$ |
90,090 |
|
|
$ |
78,116 |
|
See
accompanying notes to consolidated financial statements.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS - CONTINUED
(In
Thousands)
|
|
Year
Ended
|
|
|
|
January
3,
|
|
|
December
28,
|
|
|
December
30,
|
|
|
|
2010
|
|
|
2008
|
|
|
2007
|
|
Detail
of cash flows related to investments:
|
|
|
|
|
|
|
|
|
|
Operating
investment adjustments, net:
|
|
|
|
|
|
|
|
|
|
Other
than temporary losses on investments
|
|
$ |
3,916 |
|
|
$ |
112,741 |
|
|
$ |
9,909 |
|
Other
net recognized gains
|
|
|
(1,432 |
) |
|
|
(7,384 |
) |
|
|
(51,407 |
) |
Proceeds
from sales of trading securities
|
|
|
- |
|
|
|
- |
|
|
|
6,017 |
|
Other,
net
|
|
|
- |
|
|
|
- |
|
|
|
1,956 |
|
|
|
$ |
2,484 |
|
|
$ |
105,357 |
|
|
$ |
(33,525 |
) |
Investment
activities, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sales of available-for-sale securities, securities sold short, and
other investments
|
|
$ |
31,289 |
|
|
$ |
136,748 |
|
|
$ |
161,857 |
|
Decrease
(increase) in restricted cash held for investment
|
|
|
26,681 |
|
|
|
17,724 |
|
|
|
(34,297 |
) |
Cost
of available-for-sale securities, other investments purchased, and
payments to cover short positions in securities
|
|
|
(19,829 |
) |
|
|
(103,406 |
) |
|
|
(76,029 |
) |
|
|
$ |
38,141 |
|
|
$ |
51,066 |
|
|
$ |
51,531 |
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year in continuing operations for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
86,439 |
|
|
$ |
61,192 |
|
|
$ |
57,309 |
|
Income
taxes, net of refunds
|
|
$ |
14,952 |
|
|
$ |
5,094 |
|
|
$ |
5,455 |
|
Supplemental
schedule of noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital expenditures
|
|
$ |
108,284 |
|
|
$ |
115,419 |
|
|
$ |
87,456 |
|
Cash
capital expenditures
|
|
|
(101,914 |
) |
|
|
(106,989 |
) |
|
|
(72,990 |
) |
Non-cash
capitalized lease and certain sales-leaseback obligations
|
|
$ |
6,370 |
|
|
$ |
8,430 |
|
|
$ |
14,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
of equity consideration issued in merger with Wendy’s
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
$ |
- |
|
|
$ |
2,476,197 |
|
|
$ |
- |
|
Stock
options
|
|
$ |
- |
|
|
$ |
18,296 |
|
|
$ |
- |
|
Assumption
of debt
|
|
$ |
- |
|
|
$ |
553,438 |
|
|
$ |
- |
|
Non-cash
effect of sale of business segment
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
134,608 |
|
See
accompanying notes to consolidated financial statements.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In
Thousands Except Per Share Amounts)
Corporate
Structure
Wendy’s/Arby’s
Group, Inc. (“Wendy’s/Arby’s” and, together with its subsidiaries, the “Company”
or “we”) is a Delaware corporation. On September 29, 2008, (the “Closing Date”),
we completed the merger (the “Wendy’s Merger”) with Wendy’s International, Inc.
(“Wendy’s”) and our corporate name Triarc Companies, Inc. (“Triarc”) was changed
to Wendy’s/Arby’s Group, Inc. Wendy’s/Arby’s is the parent company of its
wholly-owned subsidiary holding company, Wendy’s/Arby’s Restaurants, LLC
(“Wendy’s/Arby’s Restaurants”). The principal wholly-owned
subsidiaries of Wendy’s/Arby’s Restaurants as of January 3, 2010 are Wendy’s and
Arby’s Restaurant Group, Inc. (“ARG” or “Arby’s”) and their subsidiaries.
Wendy’s and Arby’s are the franchisors of the Wendy’s® and Arby’s® restaurant
systems.
The
Company also has or had a number of other non-operating subsidiaries. Deerfield
& Company, LLC (“Deerfield”), an asset management business, was also a
principal subsidiary of the Company until it was sold (the “Deerfield Sale”) on
December 21, 2007.
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, 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
Deerfield Capital Corp. (“DFR”) to whom Deerfield was sold.
Principles
of Consolidation
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“GAAP”). As a result of the Wendy’s Merger, the consolidated financial
statements include the accounts of Wendy’s subsequent to the Closing
Date.
The
Company 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. 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 assets and liabilities of these funds are reported as
“Advertising funds restricted assets” and “Advertising funds restricted
liabilities.”
All
intercompany balances and transactions have been eliminated in
consolidation.
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 materially from those
estimates.
Fiscal
year
Our
fiscal reporting periods consist of 53 or 52 weeks ending on the Sunday closest
to December 31 and are referred to herein as (1) “the year ended January 3,
2010” or “2009”, which consisted of 53 weeks, (2) “the year ended December 28,
2008” or “2008” and (3) “the year ended December 31, 2007” or “2007” both of
which consisted of 52 weeks.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
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 insured
accounts.
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 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.
Accounts
and notes receivable
Accounts
and notes receivable consist primarily of royalty and franchise fee receivables,
credit card receivables and rents, principally due from franchisees. Notes
receivable (non-current) also includes a note receivable due from DFR (“DFR
Notes”) received as proceeds in the Deerfield Sale. 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 obligor.
As a
result of holding the DFR Notes received in connection with the Deerfield Sale,
the Company has potential vulnerability to risk related to interest from, and
the collection of, the DFR Notes. All quarterly cash interest payments due
through January 3, 2010 on the DFR Notes have been received on a timely basis.
Based on our assessment of the likelihood of the collectability of the full
principal amount of the DFR Notes, we have recorded an allowance for
collectability of $21,227 on these notes as of January 3, 2010 and December 28,
2008.
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
Investments
include 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.
Investments
in which we have significant influence over the investees (“Equity
Investments”), including our 50% share in a partnership in a Canadian restaurant
real estate joint venture (“TimWen”) with Tim Hortons Inc. (“THI”), 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. 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”), with related realized gains and losses
reported as income or loss in the period in which the securities are sold or
otherwise disposed.
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.
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 (loss) 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.
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
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
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.
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.
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, 5 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.
The
Company reviews its properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset group may not be
recoverable. If such review indicates an asset group may not be
recoverable, an impairment loss is recognized for the excess of the carrying
amount over the fair value of an asset group to be held and used or over the
fair value less cost to sell of an asset to be disposed. Asset groups
are primarily comprised of our individual restaurant properties.
Goodwill
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. Substantially all goodwill at January 3, 2010 and December 28, 2008
was associated with our franchise reporting units. Goodwill,
representing the excess of the cost of an acquired entity over the fair value of
the acquired net assets, is not amortized. The Company tests goodwill for
impairment annually during the fourth quarter, 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 both discounted cash flows and
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 is recognized in an amount equal to that excess.
Our fair
value 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 use, we may be required
to recognize additional goodwill impairment charges in future
years.
Other
intangible assets and deferred costs
Amortizing
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; 19 to 21 years for
franchise agreements; 1 to 5 years for costs of computer software; 20 years for
reacquired rights under franchise agreements; 20 years for trademarks with a
definite life and distribution rights; 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 (the “Funds”).
The
Company reviews intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the intangible asset may not
be recoverable. Indefinite lived intangible assets are also reviewed for
impairment annually. If such review indicates the intangible asset
may not be recoverable, an impairment loss is recognized for the excess of the
carrying amount over the fair value of the intangible asset.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
Deferred
financing costs are amortized as interest expense over the lives of the
respective debt using the interest rate method.
Derivative
instruments
The
Company’s derivative instruments, excluding those that may be settled in its own
stock, 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 fair value hedging instruments are recorded as an adjustment to
the underlying debt balance being hedged to the extent of the effectiveness of
such hedging 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)” 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 results of operations.
Share-Based
Compensation
The
Company 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
recognizes share-based compensation expense net of estimated forfeitures,
determined based on historical experience. The Company uses (1) the
Black-Scholes-Merton option pricing model (the “Black-Scholes Model”) for
purposes of determining the fair value of stock options granted and (2)
recognizes compensation costs ratably over the requisite service period for each
separately vesting portion of the award.
Foreign currency
translation
At
January 3, 2010, substantially all of the Company’s foreign operations were in
Canada where the functional currency is the Canadian
dollar. 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).”
Income taxes
We record
income tax liabilities based on known obligations and estimates of potential
obligations. A deferred tax asset or liability is recognized whenever there are
future tax effects from temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss, capital loss, and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to the years in which those differences are expected to be recovered or
settled. When considered necessary, we record a valuation allowance to reduce
the carrying amount of deferred tax assets if it is more likely than not all or
a portion of the asset will not be realized.
We apply
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 (“Uncertain Tax
Positions”). A two-step process of evaluating a tax position is
followed, whereby we first determine 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. The
Company adopted this new accounting guidance related to Uncertain Tax Positions
on January 1, 2007. As a result of adoption, the Company recorded a
reduction of retained earnings of $2,275 as of the beginning of
2007.
Interest
accrued for Uncertain Tax Positions is charged to “Interest
expense.” Penalties accrued for Uncertain Tax Positions are charged
to “General and administrative.”
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, which for
tax purposes was treated as a reverse acquisition, Wendy’s/Arby’s became part of
the Wendy’s consolidated group with Wendy’s/Arby’s as its 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.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
Revenue
recognition
“Sales”
includes revenues recognized upon delivery of food to the customer at
company-owned restaurants, 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” 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, earned prior to the Deerfield Sale, consisted of
the following types of revenues: (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 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. 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 are generally classified as a reduction of “Cost of
Sales.”
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. 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, and are included in “Cost of
sales”.
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.
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 based on lease terms. When determining the lease term, we include option
periods for which failure to renew the lease imposes a significant economic
detriment. The primary penalty to which we may be subject is the
economic detriment associated with the existence of unamortized 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. 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
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
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 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.
Favorable
and unfavorable lease amounts, when we purchase restaurants, are recorded as
components of “Other intangible assets” and “Other liabilities”, respectively,
and are amortized to “Cost of sales” – both on a straight-line basis over the
remaining term of the leases. When the expected term of a lease,
including early terminations, is determined to be shorter than the original
amortization period, the favorable or unfavorable lease balance associated with
the lease is adjusted to reflect the revised lease term and a gain or loss
recognized.
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, market rents, property lives,
discount rates, and probable term, all of which can impact (1) the
classification and accounting for a lease as capital or operating, (2) the rent
holiday and/or escalations in payment that are taken into consideration when
calculating straight-line rent, (3) the term over which leasehold improvements
for each restaurant are amortized and (4) the values and lives of favorable and
unfavorable leases. Different amounts of depreciation and amortization, interest
and rent expense would be reported if different estimates and assumptions were
used.
Non-controlling
Interests
The
Company adopted new accounting guidance related to non-controlling interests
(formerly referred to as minority interests) on the first day of fiscal
2009. This adoption resulted in the retrospective reclassification of
minority interests from its former presentation as a liability to “Stockholders’
equity.” As our non-controlling interests are no longer significant
($25, $154 and $958 at the end of 2009, 2008 and 2007, respectively), such
amounts have not been separately disclosed within “Stockholders’ equity” but
rather included in “Additional paid in capital.” Further, net loss
attributable to non-controlling interests ($28, $340 and $2,682 in 2009, 2008
and 2007, respectively) are insignificant for all periods presented and
therefore have not been separately disclosed but rather included in “Other
income (expense), net.”
Accounting
Standards Not Yet Adopted
In June
2009, the Financial Accounting Standards Board (the “FASB”) issued guidelines on
the consolidation of variable interest entities which alters how a company
determines when an entity that is insufficiently capitalized or not controlled
through voting interests should be consolidated. A company has to determine
whether it should provide consolidated reporting of an entity based upon the
entity's purpose and design and the parent company's ability to direct the
entity's actions. The guidance is effective commencing with our 2010 fiscal
year. We do not expect adoption of this guidance to have a material impact on
our consolidated financial statements.
In
January 2010, the FASB issued amendments to the existing fair value measurements
and disclosures guidance which requires new disclosures and clarifies existing
disclosure requirements. The purpose of these amendments is to
provide a greater level of disaggregated information as well as more disclosure
around valuation techniques and inputs to fair value
measurements. The guidance is effective commencing with our 2010
fiscal year. We do not expect adoption of this standard to have a
material effect on our consolidated financial statements.
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. 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 was accounted for using the purchase method of accounting and we
concluded that we were the acquirer for financial accounting purposes. The total
merger consideration was allocated to Wendy’s net tangible and intangible assets
acquired and liabilities assumed based on their fair values with the excess
recognized as goodwill of which $42,282 is deductible for tax
purposes. The total consideration includes merger related costs in
accordance with the applicable guidance effective as of the Closing
Date. The computation of the total merger consideration and the
allocation of the consideration to the net tangible and intangible assets
acquired
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
and
liabilities assumed was finalized during the year ended January 3, 2010 and is
presented in the table below:
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 converted into Wendy’s/Arby’s
options
|
|
|
18,296 |
|
Wendy’s
Merger costs
|
|
|
21,028 |
|
Total
merger consideration
|
|
|
2,515,521 |
|
|
|
|
|
|
Net
book value of Wendy’s assets acquired and liabilities
assumed
|
|
|
712,794 |
|
Excess
of merger consideration over net book value of Wendy’s assets acquired and
liabilities assumed
|
|
|
1,802,727 |
|
Changes
to fair values of assets and liabilities and deferred income tax liability
related to the merger:
|
|
|
|
|
(Increase)/decrease
in:
|
|
|
|
|
Current
assets
|
|
|
|
|
Accounts
and notes receivable
|
|
|
(694 |
) |
Prepaid
expenses and other current assets
|
|
|
985 |
|
Investments
|
|
|
(64,852 |
) |
Properties
|
|
|
(46,527 |
) |
Other
intangible assets
|
|
|
|
|
Trademark
|
|
|
(900,109 |
) |
Franchise
agreements
|
|
|
(353,000 |
) |
Favorable
leases
|
|
|
(121,620 |
) |
Computer
software
|
|
|
9,572 |
|
Deferred
costs and other assets
|
|
|
(377 |
) |
Increase/(decrease)
in:
|
|
|
|
|
Accrued
expenses and other current liabilities
|
|
|
1,956 |
|
Long-term
debt, including current portion of $228
|
|
|
(56,337 |
) |
Other
liabilities
|
|
|
(31,378 |
) |
Unfavorable
leases
|
|
|
70,762 |
|
Deferred
income tax liability
|
|
|
552,718 |
|
Total adjustments
|
|
|
(938,901 |
) |
Total
goodwill
|
|
$ |
863,826 |
|
In the
Wendy’s Merger, 376,776 shares of Wendy’s/Arby’s Class A Common Stock were
issued to Wendy’s shareholders. The equity consideration was based on
the 4.25 conversion factor of the Wendy’s outstanding shares at a value of $6.57
per share which represented the average closing market price of Triarc Class A
Common Stock two days before and after the merger announcement date of April 24,
2008. Immediately prior to the Wendy’s Merger, each share of our
Class B Common Stock was converted into Class A common stock on a one for one
basis (the “Conversion”). In connection with the May 28, 2009
amendment and restatement of our Certificate of Incorporation, our former Class
A common stock is now referred to as “Common Stock.”
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 $18,296 was calculated using the
Black-Scholes option pricing model as of April 24, 2008.
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.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
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 2007:
|
|
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 |
|
|
|
383,137 |
|
|
|
86,981 |
|
|
|
374,950 |
|
Asset
management and related fees
|
|
|
- |
|
|
|
- |
|
|
|
63,300 |
|
|
|
- |
|
Total
revenues
|
|
|
1,822,761 |
|
|
|
3,662,641 |
|
|
|
1,263,717 |
|
|
|
3,648,411 |
|
Operating
(loss) profit
|
|
|
(413,650 |
) |
|
|
(392,854 |
) |
|
|
19,900 |
|
|
|
150,437 |
|
Net
(loss) income
|
|
|
(479,741 |
) |
|
|
(492,026 |
) |
|
|
16,081 |
|
|
|
80,856 |
|
Basic
and diluted (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
(3.05 |
) |
|
|
(1.05 |
) |
|
|
.16 |
|
|
|
.17 |
|
Class
B Common Stock
|
|
|
(1.24 |
) |
|
|
N/A |
|
|
|
.18 |
|
|
|
N/A |
|
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 date 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) $9,757 of facilities
relocation costs in 2007, and (3) $6,750 of impairment of other long-lived
assets in 2007. The As Adjusted (loss) income per share data for 2008 and 2007
assume the conversion of all Class B Common Stock to Common Stock occurred prior
to 2007 and the As Adjusted data for 2007 excludes Deerfield.
Other
Restaurant Acquisitions and Dispositions
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 net consideration for acquisitions, including deal
costs, was $15,861 consisting of (1) $9,622 of cash and (2) the assumption of
$6,239 of debt.
During
the year ended January 3, 2010, the Company received proceeds from dispositions
of $10,882 consisting of $5,045 from the sale of twelve Wendy’s units to a
franchisee, $4,529 from the sale of surplus properties and $1,308 related to
other dispositions. These sales resulted in a net gain of $1,203 which is
included in “Depreciation and amortization.”
Other
restaurant acquisitions and dispositions during the periods presented were not
significant.
Sale
of Deerfield
Prior to
2007, the Company purchased 1,000 shares of DFR 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 2007. 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 2007, the
Company received restricted investments consisting of 404 of DFR restricted
shares (“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 the Company
received 21 shares of common stock of DFR. 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 shares vest
ratably over a three-year period. 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.” 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 December 2007, pursuant to agreements with
certain former executives, 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.”
On
December 21, 2007, the Company sold its 63.6% capital interest in Deerfield to
DFR. 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
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
series A
Senior Secured Notes of DFR due in December 2012 with an estimated fair value of
$46,210 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.” 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 Stock, 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, 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 personnel from a management company formed by our
Chairman, who is our former Chief Executive Officer, and our Vice Chairman, who
is our former President and Chief Operating Officer, and a director, who is our
former Vice Chairman (the “Management Company”) in connection with the provision
of services under a two-year transition services agreement (the “Services
Agreement”).
The
remaining aggregate 206 unrestricted DFR common shares, representing the portion
of the DFR Restricted Shares and other common stock of DFR distributed to us in
connection with the Deerfield Sale, and the Preferred Stock 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. We accounted for
the DFR Preferred Stock as an available-for-sale debt security due to their
mandatory redemption requirement.
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 Preferred Stock 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 to our stockholders. The
distribution in the form of a dividend, which was valued at $14,464, was paid in
2008 to holders of record of our Class A Common Stock and our Class B Common
Stock.
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” for the year ended December 28, 2008 of $67,594 (without tax
benefit as described below) which included $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).” 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” 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 the Company received, as a part of the proceeds in the
Deerfield Sale, $47,986 principal amount of 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”)
(0.25% at January 3, 2010) 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%
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
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” using the interest rate
method.
We have
received timely cash payment of all quarterly interest payments due on the DFR
Notes to date. Additionally, in October 2008 we received a $1,070
dividend payment on the DFR convertible preferred stock which we previously
held. Based on the receipt of these payments, we did not record a
reserve 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 in the fourth quarter of
2008. The 2008 charge is included in “Other than temporary losses on
investments.” The Company believes such allowance continues to be necessary at
January 3, 2010.
The DFR
Notes, net of unamortized discount and the valuation allowance, of $25,696 and
$25,344 at January 3, 2010 and December 28, 2008, respectively, are included in
non-current “Notes receivable.”
Basic
income per share for 2009 is computed by dividing net income by the weighted
average number of common shares outstanding. Prior to the Wendy’s Merger, the
Company had Class B common stock which was converted to Class A common stock and
is now referred to as “Common Stock” as discussed in Note 2.
Basic
income (loss) per share for 2008 and 2007 has been computed by dividing the
allocated loss or income for the Company’s Common Stock and the Company’s Class
B Common Stock by the weighted average number of shares of each
class. Net income for 2007 was allocated between our 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 our Common Stock and Class B
Common Stock up until the date of the Conversion; subsequent to the Conversion,
net loss was only allocated to our Common Stock since Class B Common Stock no
longer existed.
Diluted
income per share for 2009 and 2007 has been computed by dividing income for our
Common Stock and, in 2007, our Class B Common Stock by the weighted average
number of shares of each class outstanding plus the potential common share
effect of dilutive stock options and of restricted shares, computed using the
treasury stock method. Diluted loss per share for 2008 was the same as basic
loss per share for each share since the Company reported a net loss and,
therefore, the effect of all potentially dilutive securities on the net loss per
share would have been antidilutive. 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. For
2009 and 2007, we excluded 17,194 and 2,722 potential common shares,
respectively, from our diluted per share calculation as they would have had
anti-dilutive effects.
As of
January 3, 2010, our potential common shares consisted of the following: (1)
outstanding stock options which can be exercised into 23,465 shares of our
Common Stock, (2) 1,481 restricted shares of our Common Stock and (3) $2,100 of
Convertible Notes which are convertible into 160 shares of our Common
Stock.
Income
(loss) per share in 2008 and 2007 has been computed by allocating the loss or
income as follows:
|
|
2008
|
|
|
2007
|
|
Common
Stock:
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(421,599 |
) |
|
$ |
4,337 |
|
Discontinued
operations
|
|
|
1,378 |
|
|
|
286 |
|
Net
(loss) income
|
|
$ |
(420,221 |
) |
|
$ |
4,623 |
|
Class
B Common Stock:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(60,359 |
) |
|
$ |
10,749 |
|
Discontinued
operations
|
|
|
839 |
|
|
|
709 |
|
Net
(loss) income
|
|
$ |
(59,520 |
) |
|
$ |
11,458 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
The
number of shares used to calculate basic and diluted income (loss) per share was
as follows:
|
2009
|
|
2008
|
|
2007
|
Common
Stock:
|
|
|
|
|
|
Basic
shares – weighted average shares outstanding
|
466,204
|
|
137,669
|
|
28,836
|
Dilutive
effect of stock options and restricted shares
|
483
|
|
-
|
|
129
|
Diluted
shares
|
466,687
|
|
137,669
|
|
28,965
|
Class
B Common Stock:
|
|
|
|
|
|
Basic
shares – weighted average shares outstanding
|
|
|
47,965
(a)
|
|
63,523
|
Dilutive
effect of stock options and restricted shares
|
|
|
-
|
|
759
|
Diluted
shares
|
|
|
47,965
|
|
64,282
|
_____________
(a)
Represents the weighted average for the full year even though the Class B Common
Stock was converted into Common Stock on September 29, 2008.
Cash
and cash equivalents
|
|
Year
End
|
|
|
|
2009
|
|
|
2008
|
|
Cash
|
|
$ |
353,283 |
|
|
$ |
53,324 |
|
Cash
equivalents
|
|
|
238,436 |
|
|
|
36,766 |
|
|
|
$ |
591,719 |
|
|
$ |
90,090 |
|
Restricted
cash equivalents
|
|
Year
End
|
|
Current
|
|
2009
|
|
|
2008
|
|
Trust
for termination costs for former Wendy’s executives
|
|
$ |
964 |
|
|
$ |
20,641 |
|
Other
|
|
|
150 |
|
|
|
151 |
|
|
|
$ |
1,114 |
|
|
$ |
20,792 |
|
|
|
Year
End
|
|
Non-current
|
|
2009
|
|
|
2008
|
|
Trust
for termination costs for former Wendy’s executives
|
|
$ |
5,352 |
|
|
$ |
6,462 |
|
Collateral
supporting letters of credit securing payments due under
leases
|
|
|
890 |
|
|
|
1,055 |
|
Accounts
managed by the Management Company
|
|
|
- |
|
|
|
26,515 |
|
|
|
$ |
6,242 |
|
|
$ |
34,032 |
|
Accounts
and notes receivable
|
|
Year
End
|
|
Current
|
|
2009
|
|
|
2008
|
|
Accounts
receivable:
|
|
|
|
|
|
|
Franchisees
|
|
$ |
74,555 |
|
|
$ |
68,895 |
|
Other
|
|
|
17,090 |
|
|
|
25,803 |
|
|
|
|
91,645 |
|
|
|
94,698 |
|
Notes
receivable:
|
|
|
|
|
|
|
|
|
Franchisees
|
|
|
2,899 |
|
|
|
3,447 |
|
|
|
|
94,544 |
|
|
|
98,145 |
|
Allowance
for doubtful accounts
|
|
|
(6,540 |
) |
|
|
(887 |
) |
|
|
$ |
88,004 |
|
|
$ |
97,258 |
|
|
|
Year
End
|
|
Non-Current
|
|
2009
|
|
|
2008
|
|
Notes
receivable:
|
|
|
|
|
|
|
DFR
|
|
$ |
46,922 |
|
|
$ |
46,571 |
|
Franchisees
|
|
|
9,850 |
|
|
|
9,841 |
|
AFA
Service Corporation
|
|
|
5,089 |
|
|
|
- |
|
|
|
|
61,861 |
|
|
|
56,412 |
|
Allowance
for doubtful accounts
|
|
|
(22,566 |
) |
|
|
(21,804 |
) |
|
|
$ |
39,295 |
|
|
$ |
34,608 |
|
The
following is an analysis of the allowance for doubtful accounts:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Balance
at beginning of year:
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
887 |
|
|
$ |
166 |
|
|
$ |
224 |
|
Non-current
|
|
|
21,804 |
|
|
|
354 |
|
|
|
- |
|
Provision
for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
DFR
Notes
|
|
|
- |
|
|
|
21,227 |
|
|
|
- |
|
Franchisees
|
|
|
8,342 |
|
|
|
783 |
|
|
|
277 |
|
Other
|
|
|
(173 |
) |
|
|
(113 |
) |
|
|
354 |
|
Uncollectible
accounts written off, net of recoveries
|
|
|
(1,754 |
) |
|
|
274 |
|
|
|
(335 |
) |
Balance
at end of year:
Current
|
|
|
6,540 |
|
|
|
887 |
|
|
|
166 |
|
Non-current
|
|
|
22,566 |
|
|
|
21,804 |
|
|
|
354 |
|
Total
|
|
$ |
29,106 |
|
|
$ |
22,691 |
|
|
$ |
520 |
|
Properties
|
|
Year
End
|
|
|
|
2009
|
|
|
2008
|
|
Owned:
|
|
|
|
|
|
|
Land
|
|
$ |
467,249 |
|
|
$ |
460,588 |
|
Buildings
and improvements (a)
|
|
|
411,671 |
|
|
|
682,280 |
|
Office,
restaurant and transportation equipment
|
|
|
435,824 |
|
|
|
388,966 |
|
Leasehold
improvements (a)
|
|
|
406,254 |
|
|
|
171,569 |
|
Leased
(b):
|
|
|
|
|
|
|
|
|
Capitalized
leases
|
|
|
110,363 |
|
|
|
127,728 |
|
Sale-leaseback
assets
|
|
|
134,648 |
|
|
|
146,122 |
|
|
|
|
1,966,009 |
|
|
|
1,977,253 |
|
Accumulated
depreciation and amortization
|
|
|
(346,761 |
) |
|
|
(206,881 |
) |
|
|
$ |
1,619,248 |
|
|
$ |
1,770,372 |
|
(a)
|
The
2009 amounts reflect a reclassification of approximately $200,000 from
Buildings and improvements to Leasehold improvements related to assets
acquired in the Wendy’s Merger.
|
(b)
|
These
assets principally include buildings and
improvements.
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
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:
|
|
Year
End
|
|
|
|
2009
|
|
|
2008
|
|
Cash
and cash equivalents
|
|
$ |
515,655 |
|
|
$ |
19,853 |
|
Accounts
and notes receivable (including long-term)
|
|
|
98,320 |
|
|
|
17,482 |
|
Inventories
|
|
|
21,870 |
|
|
|
11,096 |
|
Investments
|
|
|
4,664 |
|
|
|
- |
|
Properties
|
|
|
531,534 |
|
|
|
335,739 |
|
Other
intangible assets
|
|
|
1,256,800 |
|
|
|
22,299 |
|
Deferred
costs and other assets
|
|
|
- |
|
|
|
2,571 |
|
|
|
$ |
2,428,843 |
|
|
$ |
409,040 |
|
Accrued
expenses and other current liabilities
|
|
Year
End
|
|
|
|
2009
|
|
|
2008
|
|
Accrued
compensation and related benefits
|
|
$ |
81,864 |
|
|
$ |
65,262 |
|
Insurance
reserves
|
|
|
54,924 |
|
|
|
67,004 |
|
Accrued
taxes
|
|
|
38,762 |
|
|
|
42,753 |
|
Accrued
interest
|
|
|
34,569 |
|
|
|
9,776 |
|
Other
|
|
|
58,971 |
|
|
|
66,789 |
|
|
|
$ |
269,090 |
|
|
$ |
251,584 |
|
Short-Term
The
Company’s short-term investment, included in “Prepaid expenses and other current
assets,” was carried at a fair market value of $263 and $162 at January 3, 2010
and December 28, 2008, respectively, and was our only remaining short-term
investment as of the end of 2009 and 2008. On January 8, 2010, we sold the
short-term investment for approximately $288.
Long-Term
The
following is a summary of the carrying value of non-current
investments:
|
|
|
|
|
Year
End 2008
|
|
|
|
Year
End 2009
|
|
|
|
|
|
Unrealized
Holding
|
|
|
Fair
|
|
|
Carrying
|
|
|
|
Carrying Value
|
|
|
Cost (a)
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
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 |
|
Non-marketable
equity securities, at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,414 |
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint
venture with THI
|
|
$ |
97,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,771 |
|
Other
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
212 |
|
At
cost:
|
|
|
9,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,655 |
|
|
|
|
107,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,638 |
|
|
|
$ |
107,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
133,052 |
|
__________________________________
(a)
|
The
cost of available-for-sale securities have been reduced by any “Other Than
Temporary Losses on Investments.”
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
Equities
Account
In 2005,
we invested $75,000 in brokerage accounts (the “Equities Account”), which were
managed by the Management Company. The Equities Account was invested
principally in equity securities, cash equivalents and equity derivatives of a
limited number of publicly-traded companies. In addition, the Equities Account
sold securities short and invested in market put options in order to lessen the
impact of significant market downturns.
In June
2009, we and the Management Company entered into a withdrawal agreement (the
“Withdrawal Agreement”) which provided that we would be permitted to withdraw
all amounts in the Equities Account on an accelerated basis (the “Early
Withdrawal”) effective no later than June 26, 2009. Prior to the Withdrawal
Agreement and as a result of an investment management agreement with the
Management Company which was terminated on June 26, 2009, we had not been
permitted to withdraw any amounts from the Equities Account until December 31,
2010, although $47,000 was released to us from the Equities Account in 2008
subject to an obligation to return that amount to the Equities Account by a
specified date. In consideration for obtaining such Early Withdrawal
right, we agreed to pay the Management Company $5,500 (the “Withdrawal Fee”),
were not required to return the $47,000 referred to above and were no longer
obligated to pay investment management and incentive fees to the Management
Company. The Equities Account investments were liquidated in June 2009 for
$37,401 (the “Equities Sale”), of which $31,901 was received by us, net of the
Withdrawal Fee and for which we realized a gain of $2,280 in 2009, which are
both included in “Investment (expense) income, net.”
Liquidation
Services Agreement
On June
10, 2009, Wendy’s/Arby’s and the Management Company entered into a liquidation
services agreement (the “Liquidation Services Agreement”) whereby, the
Management Company will assist us in the sale, liquidation or other disposition
of our cost investments and DFR Notes, (the “Legacy Assets”), which
are not related to the Equities Account. As of the date of the
Liquidation Services Agreement, the Legacy Assets were valued at $36,600 (the
“Target Amount”). The Liquidation Services Agreement, which expires
June 30, 2011, provided for the payment of a fee of $900 in two installments to
the Management Company which is being recognized as expense over the term of the
agreement and included in “General and administrative.” In addition,
in the event that any or all of the Legacy Assets are sold, liquidated or
otherwise disposed of and the aggregate net proceeds to us are in excess of the
Target Amount, we will pay the Management Company a success fee equal to 10% of
the aggregate net proceeds in excess of the Target Amount.
DFR
Investments
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. The Company received $4,171 of distributions with
respect to its aggregate investment in DFR during 2007 which, in accordance with
the Equity Method, reduced the carrying value of this investment.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
Presented
below is summary financial information of DFR as of and for the year ended
December 31, 2007, DFR’s year end. As we held our equity investment in DFR for
less than one quarter in 2008, we have not presented any data for that year. The
company’s actual ownership in DFR Common Stock was 0.3% in 2007. 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 |
|
Income
statement information:
|
|
|
|
|
Revenues
|
|
$ |
92,536 |
|
Loss
before income taxes
|
|
|
(95,256 |
) |
Net
loss
|
|
|
(96,591 |
) |
Investment
in joint venture with Tim Hortons Inc.
Wendy’s
is a partner in TimWen and our 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, net.” The carrying
value of our investment in TimWen exceeded the Company’s interest in the
underlying equity of the joint venture by $59,446 and $54,787 as of January 3,
2010 and December 28, 2008, respectively, primarily due to purchase price
adjustments recorded in the Wendy’s Merger, net of accumulated
amortization. This purchase price adjustment is being accounted for
as if TimWen were a consolidated subsidiary, and is assumed to have been
allocated to net amortizable assets with an average life of 21.2
years.
Presented
below is activity related to our portion of TimWen included in our Consolidated
Balance Sheets and Consolidated Statements of Operations as of and for the year
ended January 3, 2010 and the quarter ended December 28, 2008.
|
|
2009
|
|
|
2008
|
|
Balance
at beginning of period
|
|
$ |
89,771 |
|
|
$ |
41,649 |
|
Purchase
price adjustments
|
|
|
- |
|
|
|
65,455 |
|
|
|
|
89,771 |
|
|
|
107,104 |
|
|
|
|
|
|
|
|
|
|
Equity
in net earnings for the period
|
|
|
11,334 |
|
|
|
2,630 |
|
Amortization
of purchase price adjustments
|
|
|
(2,835 |
) |
|
|
(656 |
) |
|
|
|
8,499 |
|
|
|
1,974 |
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
(14,583 |
) |
|
|
(2,864 |
) |
Currency
translation adjustment included in “Comprehensive Income”
|
|
|
13,789 |
|
|
|
(16,443 |
) |
Balance
at end of period
|
|
$ |
97,476 |
|
|
$ |
89,771 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
Presented
below is a summary of financial information of TimWen as of and for the year and
quarter ended January 3, 2010 and December 28, 2008, respectively, in Canadian
dollars. The summary balance sheet financial information does not
distinguish between current and long-term assets and liabilities:
|
|
January
3, 2010
|
|
|
December
28, 2008
|
|
Balance
sheet information:
|
|
|
|
|
|
|
Properties
|
|
C$ |
83,078 |
|
|
C$ |
87,292 |
|
Cash
and cash equivalents
|
|
|
75 |
|
|
|
5,063 |
|
Accounts
receivable
|
|
|
4,989 |
|
|
|
3,339 |
|
Other
|
|
|
3,150 |
|
|
|
3,142 |
|
|
|
C$ |
91,292 |
|
|
C$ |
98,836 |
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
C$ |
2,257 |
|
|
C$ |
2,521 |
|
Other
liabilities
|
|
|
9,081 |
|
|
|
10,893 |
|
Partners’
equity
|
|
|
79,954 |
|
|
|
85,422 |
|
|
|
C$ |
91,292 |
|
|
C$ |
98,836 |
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended January 3,
2010
|
|
|
Quarter
ended December 28,
2008
|
|
Income
statement information:
|
|
|
|
|
|
|
|
|
Revenues
|
|
C$ |
38,471 |
|
|
C$ |
9,462 |
|
Income
before income taxes and net income
|
|
|
27,532 |
|
|
|
6,325 |
|
|
|
|
|
|
|
|
|
|
Investment
in Jurlique International Pty Ltd.
We
account for our approximately 11% investment in Jurlique International Pty Ltd.
(“Jurlique”) (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) 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.
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, economic
conditions and our internal valuations of the company, we determined that our
investment in this company was more than likely not recoverable. Therefore, we
recorded other than temporary losses of $8,504 in 2008.
Investment
Activity
Proceeds
from sales 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 (expense) income, net” are as follows:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Proceeds
from sales
|
|
$ |
32,243 |
|
|
$ |
87,301 |
|
|
$ |
105,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
realized gains
|
|
$ |
3,035 |
|
|
$ |
4,222 |
|
|
$ |
21,691 |
|
Gross
realized losses
|
|
|
(618 |
) |
|
|
(5,809 |
) |
|
|
(682 |
) |
|
|
$ |
2,417 |
|
|
$ |
(1,587 |
) |
|
$ |
21,009 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
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
(loss) income:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Unrealized
holding gains (losses) arising during the year
|
|
$ |
101 |
|
|
$ |
(4,505 |
) |
|
$ |
(9,842 |
) |
Reclassifications
of prior year unrealized holding (gains) losses into net
income
or loss
|
|
|
(168 |
) |
|
|
8,206 |
|
|
|
(15,811 |
) |
Equity
in change in unrealized holding (losses) gains arising during the
year
|
|
|
- |
|
|
|
(201 |
) |
|
|
2,170 |
|
|
|
|
(67 |
) |
|
|
3,500 |
|
|
|
(23,483 |
) |
Income
tax benefit (provision)
|
|
|
18 |
|
|
|
(1,288 |
) |
|
|
8,723 |
|
Non-controlling
interests in increase in unrealized holding gains of a consolidated
subsidiary
|
|
|
- |
|
|
|
- |
|
|
|
(697 |
) |
|
|
$ |
(49 |
) |
|
$ |
2,212 |
|
|
$ |
(15,457 |
) |
The
following is a summary of the components of goodwill for each business
segment:
|
|
2009
|
|
|
2008
|
|
|
|
Arby’s
Restaurant Segment
|
|
|
Wendy’s
Restaurant Segment
|
|
|
Total
|
|
|
Arby’s
Restaurant Segment
|
|
|
Wendy’s
Restaurant Segment
|
|
|
Total
|
|
Balance
at beginning of year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$ |
499,692 |
|
|
$ |
836,158 |
|
|
$ |
1,335,850 |
|
|
$ |
490,778 |
|
|
$ |
- |
|
|
$ |
490,778 |
|
Accumulated
impairment losses
|
|
|
(482,075 |
) |
|
|
- |
|
|
|
(482,075 |
) |
|
|
(22,000 |
) |
|
|
- |
|
|
|
(22,000 |
) |
|
|
|
17,617 |
|
|
|
836,158 |
|
|
|
853,775 |
|
|
|
468,778 |
|
|
|
- |
|
|
|
468,778 |
|
Changes
in goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wendy’s
Merger
|
|
|
- |
|
|
|
18,195 |
|
|
|
18,195 |
|
|
|
- |
|
|
|
845,631 |
|
|
|
845,631 |
|
Other
restaurant acquisitions
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,914 |
|
|
|
- |
|
|
|
8,914 |
|
Impairment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(460,075 |
) |
|
|
- |
|
|
|
(460,075 |
) |
Currency
translation adjustment
|
|
|
- |
|
|
|
9,049 |
|
|
|
9,049 |
|
|
|
- |
|
|
|
(9,473 |
) |
|
|
(9,473 |
) |
Balance
at end of year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
499,692 |
|
|
|
863,402 |
|
|
|
1,363,094 |
|
|
|
499,692 |
|
|
|
836,158 |
|
|
|
1,335,850 |
|
Accumulated
impairment losses
|
|
|
(482,075 |
) |
|
|
- |
|
|
|
(482,075 |
) |
|
|
(482,075 |
) |
|
|
- |
|
|
|
(482,075 |
) |
|
|
$ |
17,617 |
|
|
$ |
863,402 |
|
|
$ |
881,019 |
|
|
$ |
17,617 |
|
|
$ |
836,158 |
|
|
$ |
853,775 |
|
The
following is a summary of the components of other intangible
assets:
|
|
Year
End 2009
|
|
|
Year
End 2008
|
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Non-amortizable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wendy’s
trademarks
|
|
$ |
903,000 |
|
|
$ |
- |
|
|
$ |
903,000 |
|
|
$ |
900,389 |
|
|
$ |
- |
|
|
$ |
900,389 |
|
Amortizable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
agreements
|
|
|
352,630 |
|
|
|
21,148 |
|
|
|
331,482 |
|
|
|
350,033 |
|
|
|
4,152 |
|
|
|
345,881 |
|
Favorable
leases
|
|
|
144,683 |
|
|
|
20,627 |
|
|
|
124,056 |
|
|
|
147,881 |
|
|
|
9,650 |
|
|
|
138,231 |
|
Reacquired
rights under franchise agreements
|
|
|
17,348 |
|
|
|
3,721 |
|
|
|
13,627 |
|
|
|
19,009 |
|
|
|
3,142 |
|
|
|
15,867 |
|
Computer
software
|
|
|
32,150 |
|
|
|
11,432 |
|
|
|
20,718 |
|
|
|
18,259 |
|
|
|
7,154 |
|
|
|
11,105 |
|
|
|
$ |
1,449,811 |
|
|
$ |
56,928 |
|
|
$ |
1,392,883 |
|
|
$ |
1,435,571 |
|
|
$ |
24,098 |
|
|
$ |
1,411,473 |
|
Aggregate
amortization expense:
|
|
|
|
Actual
for fiscal year (a):
|
|
Total
|
|
2007
(b)
|
|
$ |
13,509 |
|
2008
|
|
|
13,470 |
|
2009
|
|
|
44,837 |
|
Estimate
for fiscal year:
|
|
|
|
|
2010
|
|
$ |
34,180 |
|
2011
|
|
|
32,085 |
|
2012
|
|
|
30,423 |
|
2013
|
|
|
29,349 |
|
2014
|
|
|
27,693 |
|
Thereafter
|
|
|
336,153 |
|
______________
(a)
|
Includes
$7,674, $1,096 and $5,328 of impairment charges related to other
intangible assets in 2009, 2008 and 2007, respectively which have been
recorded as a reduction in the cost basis of the related intangible
asset.
|
(b)
|
Includes
$2,375 of amortization of asset management contracts until their disposal
with the Deerfield Sale.
|
Long-term
debt consisted of the following:
|
|
Year
End
|
|
|
|
2009
|
|
|
2008
|
|
10.00%
Senior Notes, due 2016 (a)
|
|
$ |
551,779 |
|
|
$ |
- |
|
Senior
secured term loan, average effective interest of 7.25% as of January 3,
2010 (b)
|
|
|
251,488 |
|
|
|
385,030 |
|
6.20%
senior notes, due in 2014 (c)
|
|
|
204,303 |
|
|
|
199,111 |
|
6.25%
senior notes, due in 2011 (c)
|
|
|
193,618 |
|
|
|
188,933 |
|
Sale-leaseback
obligations due through 2029 (d)
|
|
|
125,176 |
|
|
|
123,829 |
|
Capitalized
lease obligations due through 2036 (e)
|
|
|
89,886 |
|
|
|
106,841 |
|
7%
Debentures, due in 2025 (f)
|
|
|
80,081 |
|
|
|
78,974 |
|
6.54%
Secured equipment term loan, due in 2013 (g)
|
|
|
18,901 |
|
|
|
19,790 |
|
Other
|
|
|
7,679 |
|
|
|
9,069 |
|
|
|
|
1,522,911 |
|
|
|
1,111,577 |
|
Less
amounts payable within one year
|
|
|
(22,127 |
) |
|
|
(30,426 |
) |
|
|
$ |
1,500,784 |
|
|
$ |
1,081,151 |
|
Aggregate
annual maturities of long-term debt, excluding the effect of purchase accounting
adjustments, discounts and interest rate swaps, as of January 3, 2010 were as
follows:
Fiscal Year
|
|
Amount
|
|
2010
|
|
$ |
22,127 |
|
2011
|
|
|
338,128 |
|
2012
|
|
|
136,317 |
|
2013
|
|
|
21,567 |
|
2014
|
|
|
236,063 |
|
Thereafter
|
|
|
828,928 |
|
|
|
$ |
1,583,130 |
|
(a)
|
On
June 23, 2009, Wendy’s/Arby’s Restaurants issued $565,000 principal amount
of Senior Notes (the “Senior Notes”). The Senior Notes will mature on July
15, 2016 and accrue interest at 10.00% per annum, payable semi-annually on
January 15 and July 15, the first payment of which was made on January 15,
2010. The Senior Notes were issued at 97.533% of the principal amount,
representing a yield to maturity of 10.50% and resulting in net proceeds
paid to us of $551,061. The $13,939 discount is being accreted and the
related charge included in “Interest expense” until the Senior Notes
mature. The Senior Notes are fully and unconditionally guaranteed, jointly
and severally, on an unsecured basis by certain direct and indirect
domestic subsidiaries of Wendy’s/Arby’s Restaurants (collectively, the
“Guarantors”). Wendy’s/Arby’s Restaurants incurred
approximately $21,599 in costs related to the issuance of the Senior Notes
which are being amortized to “Interest expense” over the Senior Notes’
term utilizing the effective interest
method.
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
An
indenture for the Senior Notes dated as of June 23, 2009 (the “Indenture”) among
Wendy’s/Arby’s Restaurants, the Guarantors and U.S. Bank National Association,
as trustee (the “Trustee”), includes certain customary covenants that, subject
to a number of important exceptions and qualifications, limit the ability of
Wendy’s/Arby’s Restaurants and its restricted subsidiaries to, among other
things, incur debt or issue preferred or disqualified stock, pay dividends on
equity interests, redeem or repurchase equity interests or prepay or repurchase
subordinated debt, make some types of investments and sell assets, incur certain
liens, engage in transactions with affiliates (except on an arms-length basis),
and consolidate, merge or sell all or substantially all of their assets. The
covenants generally do not restrict Wendy’s/Arby’s or any of its subsidiaries
that are not subsidiaries of Wendy’s/Arby’s Restaurants.
(b)
The
Arby’s Credit Agreement was amended and restated as of March 11, 2009 and
includes an amended senior secured term loan (the “Amended Term Loan”) and an
amended senior secured revolving credit facility (the “Amended
Revolver”). As a result of an agreement entered into on March 17,
2009, the amount of the senior secured revolving credit facility increased from
$100,000 to $170,000. Also, Wendy’s and certain of its affiliates
became co-obligors in addition to Arby’s and certain of its
affiliates. The Amended Term Loan is due July 2012 and the Amended
Revolver expires in July 2011.
On June
10, 2009, Wendy’s/Arby’s Restaurants entered into an Amendment No. 1 to the
amended and restated Arby’s Credit Agreement (as so amended, the “Credit
Agreement”) which, among other things (1) permitted the issuance by
Wendy’s/Arby’s Restaurants of the Senior Notes described above and the
incurrence of debt thereunder, and permitted Wendy’s/Arby’s Restaurants to
dividend to Wendy’s/Arby’s the net cash proceeds of the Senior Notes issuance
less $132,500 used to prepay the Amended Term Loan and pay accrued interest
thereon and certain other payments, (2) modified certain total leverage
financial covenants, added certain financial covenants based on senior secured
leverage ratios and modified the minimum interest coverage ratio, (3) permitted
the prepayment at any time prior to maturity of certain senior notes of Wendy’s
and eliminated certain incremental debt baskets in the covenant prohibiting the
incurrence of additional indebtedness and (4) modified the interest margins to
provide that the margins will fluctuate based on Wendy’s/Arby’s Restaurants’
corporate credit rating. Wendy’s/Arby’s Restaurants incurred approximately
$3,107 in costs related to Amendment No. 1.
The
Amended Term Loan and amounts borrowed under the Amended Revolver under the
Credit Agreement bear interest at our option at either (i) the Eurodollar Rate
(as defined in the Credit Agreement), as adjusted pursuant to applicable
regulations (but not less than 2.75%), plus an interest rate margin of 4.00%,
4.50%, 5.00% or 6.00% per annum, depending on Wendy’s/Arby’s Restaurants’
corporate credit rating, or (ii) the Base Rate (as defined in the Credit
Agreement), which is the higher of the interest rate announced by the
administrative agent for the Credit Agreement as its base rate and the Federal
funds rate plus 0.50% (but not less that 3.75%), in either case plus an interest
rate margin of 3.00%, 3.50%, 4.00% or 5.00% per annum, depending on
Wendy’s/Arby’s Restaurants’ corporate credit rating. Based on Wendy’s/Arby’s
Restaurants’ corporate credit rating at the effective date of Amendment No. 1
and as of January 3, 2010, the applicable interest rate margins available to us
were 4.50% for Eurodollar Rate borrowings and 3.50% for Base Rate borrowings.
Since the effective date of Amendment No. 1 and as of January 3, 2010, we have
elected to use the Base Rate which resulted in a rate of 7.25% as of January 3,
2010.
The
obligations under the Credit Agreement were secured by substantially all of the
assets, other than real property, of the Wendy’s and Arby’s restaurants segments
which had an aggregate net book value of approximately $2,227,682 as of January
3, 2010 and were also guaranteed by substantially all of the entities comprising
the Wendy’s and Arby’s restaurants segments. In addition, the Credit
Agreement contained various covenants relating to the Wendy’s and Arby’s
restaurants segments, 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 January 3, 2010. As
of January 3, 2010 there was $306,523 available for the payment of dividends
indirectly to Wendy’s/Arby’s under the covenants of the Credit Agreement which
includes the net proceeds, as defined, from the Senior Notes less any dividends
paid since their issuance.
During
2009, we borrowed a total of $51,182 under the Amended Revolver; however, no
amounts were outstanding as of January 3, 2010. The Amended Revolver
includes a sub-facility for the issuance of letters of credit up to
$50,000. The availability under the Amended Revolver as of January 3,
2010 was $136,413, which is net of $33,587 for outstanding letters of
credit.
(c)
Wendy’s
senior notes were reduced to fair value at the date of and in connection with
the Wendy’s Merger based on outstanding principal of $225,000 and $200,000 and
effective interest rates of 7.0% and 6.6% for the 6.20% senior notes and 6.25%
senior notes, respectively. The fair value adjustment is being accreted and the
related charge included in “Interest expense” until the notes
mature. The value of the Wendy’s senior notes is adjusted to reflect
the fair value of interest rate swaps associated with this debt (the “Interest
Rate Swaps”). As of January 3, 2010, this adjustment increased the
value of the 6.20% senior notes and the 6.25% senior notes by $682 and $907,
respectively. These notes are unsecured and are redeemable prior to
maturity at our option. The Wendy’s 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 January 3,
2010.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
(d) The
sale-leaseback obligations (the “Sale-Leaseback Obligations”), which extend
through 2029, relate to capitalized restaurant leased assets with an aggregate
net book value of $102,583 as of January 3, 2010.
(e)
|
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 $58,512 and $6,388
respectively, as of January 3, 2010 and Wendy’s capitalized leased
buildings with aggregate net book value of
$20,317.
|
(f)
|
Wendy’s
7% Debentures (the “Debentures”) are unsecured and were reduced to fair
value at the date of and in connection with the Wendy’s Merger based on
their outstanding principal of $100,000 and an effective interest rate of
8.6%. The fair value adjustment is being accreted and the related charge
included in “Interest expense” until the Debentures
mature. 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
January 3, 2010.
|
(g)
|
During
2008 we entered into a $20,000 financing facility for one of our existing
aircraft (the “Equipment Term Loan”). Subsequent to year end we
made a $5,000 prepayment on the Equipment Term Loan. The facility requires
monthly payments, including interest, of approximately $180 through August
2013 with a final balloon payment of approximately $10,180 due September
2013. This loan is secured by an airplane with a net book value
of $10,812 as of January 3, 2010.
|
A
significant number of the underlying leases in the Arby’s restaurants segment
for sale-leaseback obligations and capitalized lease obligations, as well as the
operating leases, require or required periodic financial reporting of certain
subsidiary entities within ARG or of individual restaurants, which in many cases
have not been prepared or reported. The Company has negotiated waivers and
alternative covenants with its most significant lessors which substitute
consolidated financial reporting of ARG for that of individual subsidiary
entities and which modify restaurant level reporting requirements for more than
half of the affected leases. Nevertheless, as of January 3, 2010, 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
for the Arby’s restaurant system, in which we have voting interests of
substantially less than 50%, had a bank line of credit that matured and was not
renewed as of January 2010. In connection with the establishment of a
revolving loan agreement with ARG discussed further in Related Party
Transactions, AFA utilized the revolving line with ARG and repaid all amounts
outstanding under its bank line of credit on December 28, 2009.
Wendy’s
U.S. advertising fund has a revolving line of credit of $25,000. Neither the
Company, nor Wendy’s, is the guarantor of the debt. The advertising fund
facility was established to fund the advertising fund operations. The
availability under this line of credit as of January 3, 2010 was
$20,344.
At
January 3, 2010, one of Wendy’s Canadian subsidiaries had a revolving credit
facility of C$6,000 which bears interest at the Bank of Montreal Prime Rate.
Wendy’s guarantees this debt. The availability under this facility as
of January 3, 2010 was C$5,698.
During
the third quarter of 2009, we entered into the Interest Rate Swaps with notional
amounts totaling $361,000 that swap the fixed rate interest rates on our 6.20%
and 6.25% Wendy’s senior notes for floating rates. The Company’s primary
objective for entering into derivative instruments is to manage its exposure to
changes in interest rates, as well as to maintain an appropriate mix of fixed
and variable rate debt. The Interest Rate Swaps are accounted for as fair value
hedges and qualify for the short-cut method under the applicable guidance. At
January 3, 2010, the fair value of our Interest Rate Swaps was $1,589 and has
been included in “Deferred costs and other assets” and as an adjustment to the
carrying amount of the 6.20% and 6.25% Wendy’s senior notes.
At
December 28, 2008, we also had the following derivative instruments: (1) put
options on equity securities and (2) total return swaps on equity securities.
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. Prior to
their expiration through October 2008, we also had three interest rate swap
agreements (the “Term Loan Swap Agreements”) related to our Term
Loan. The Term Loan Swap Agreements hedged a portion of the related
Term Loan interest rate risk exposure. 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
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
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.
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.
The
Company’s cash flow hedges included the Term Loan 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
|
|
Unrealized
holding gains (losses) arising during the year
|
|
$ |
251 |
|
|
$ |
(826 |
) |
Equity
in change in unrealized holding gains (losses) arising during the
year
|
|
|
3 |
|
|
|
(1,087 |
) |
Reclassifications
of prior year unrealized holding gains into net income or
loss
|
|
|
- |
|
|
|
(1,951 |
) |
|
|
|
254 |
|
|
|
(3,864 |
) |
Income
tax (provision) benefit
|
|
|
(99 |
) |
|
|
1,472 |
|
|
|
$ |
155 |
|
|
$ |
(2,392 |
) |
The
following income and expense items were recognized by the Company related to its
derivative activity during each of the years presented below:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Interest
expense (income):
|
|
|
|
|
|
|
|
|
|
Interest
Rate Swaps
|
|
$ |
(2,865 |
) |
|
$ |
- |
|
|
$ |
- |
|
Term
Loan Swap Agreements
|
|
|
- |
|
|
|
1,797 |
|
|
|
(1,917 |
) |
Investment
expense (income), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Put
and call option combinations on equity securities
|
|
|
(286 |
) |
|
|
(2,411 |
) |
|
|
(3,315 |
) |
Total
return swaps on equity securities
|
|
|
- |
|
|
|
5,165 |
|
|
|
(2,144 |
) |
Put
options
|
|
|
- |
|
|
|
(1,036 |
) |
|
|
1,036 |
|
Trading
derivatives
|
|
|
- |
|
|
|
- |
|
|
|
741 |
|
Other
expense, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement
of foreign currency put and call arrangement
|
|
|
- |
|
|
|
- |
|
|
|
877 |
|
|
|
$ |
(3,151 |
) |
|
$ |
3,515 |
|
|
$ |
(4,722 |
) |
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
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
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents (a)
|
|
$ |
591,719 |
|
|
$ |
591,719 |
|
|
$ |
90,090 |
|
|
$ |
90,090 |
|
Restricted
cash equivalents (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
1,114 |
|
|
|
1,114 |
|
|
|
20,792 |
|
|
|
20,792 |
|
Non-current
|
|
|
6,242 |
|
|
|
6,242 |
|
|
|
34,032 |
|
|
|
34,032 |
|
Short-term
investment (b)
|
|
|
263 |
|
|
|
263 |
|
|
|
162 |
|
|
|
162 |
|
DFR
Notes receivable (c)
|
|
|
25,696 |
|
|
|
28,655 |
|
|
|
25,344 |
|
|
|
25,344 |
|
Non-current
Cost Investments for which it is:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Practicable
to estimate fair value (d)
|
|
|
9,544 |
|
|
|
11,355 |
|
|
|
12,010 |
|
|
|
11,927 |
|
Not
practicable to estimate fair value (e)
|
|
|
- |
|
|
|
|
|
|
|
788 |
|
|
|
|
|
Restricted
investments (b)
|
|
|
- |
|
|
|
- |
|
|
|
30,271 |
|
|
|
30,271 |
|
Interest
Rate Swaps (f)
|
|
|
1,589 |
|
|
|
1,589 |
|
|
|
- |
|
|
|
- |
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, including current portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.00%
Senior Notes (b)
|
|
|
551,779 |
|
|
|
610,200 |
|
|
|
- |
|
|
|
- |
|
Senior
secured term loan, weighted average effective interest of 7.25% as
of
January
3, 2010 (b)
|
|
|
251,488 |
|
|
|
252,904 |
|
|
|
385,030 |
|
|
|
238,718 |
|
6.20%
senior notes (b)
|
|
|
204,303 |
|
|
|
223,425 |
|
|
|
199,111 |
|
|
|
168,974 |
|
6.25%
senior notes (b)
|
|
|
193,618 |
|
|
|
199,200 |
|
|
|
188,933 |
|
|
|
176,000 |
|
Sale-leaseback
obligations (g)
|
|
|
125,176 |
|
|
|
118,634 |
|
|
|
123,829 |
|
|
|
136,707 |
|
Capitalized
lease obligations (g)
|
|
|
89,886 |
|
|
|
86,706 |
|
|
|
106,841 |
|
|
|
111,788 |
|
7%
Debentures (b)
|
|
|
80,081 |
|
|
|
85,500 |
|
|
|
78,974 |
|
|
|
61,320 |
|
6.54%
Secured equipment term loan (g)
|
|
|
18,901 |
|
|
|
18,790 |
|
|
|
19,790 |
|
|
|
21,072 |
|
Other
|
|
|
7,679 |
|
|
|
7,643 |
|
|
|
9,069 |
|
|
|
9,262 |
|
Total
long-term debt, including current portion
|
|
$ |
1,522,911 |
|
|
$ |
1,603,002 |
|
|
$ |
1,111,577 |
|
|
$ |
923,841 |
|
Securities
sold with an obligation to purchase - restricted (b)
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
16,626 |
|
|
$ |
16,626 |
|
Other
derivatives in liability
positions
- restricted (b)
|
|
|
- |
|
|
|
- |
|
|
|
2,979 |
|
|
|
2,979 |
|
Guarantees
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
obligations for Arby’s restaurants not operated by the Company
(h)
|
|
|
382 |
|
|
|
382 |
|
|
|
460 |
|
|
|
460 |
|
Debt
obligations of AmeriGas Eagle Propane, L.P. (i)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
690 |
|
Wendy’s
franchisee loans obligations (j)
|
|
$ |
592 |
|
|
$ |
592 |
|
|
$ |
706 |
|
|
$ |
706 |
|
(a)
|
The
carrying amounts approximated fair value due to the short-term maturities
of the cash equivalents or restricted cash
equivalents.
|
(b)
|
The
fair values are based on quoted market
prices.
|
(c)
|
The
fair value of the DFR Notes is based on the present value of the
probability weighted average of expected cash flows of the DFR
Notes.
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
(d)
|
These
consist of investments in certain non-current cost
investments. The fair values of these investments were based
entirely on statements of account received from investment managers or
investees which 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.
|
(e)
|
It
was not practicable to estimate the fair value of this cost investment
because the investment was
non-marketable.
|
(f)
|
The
fair values were estimated by the Company based on information provided by
the bank counterparties that is model-driven and whose inputs are
observable or whose significant value drivers are
observable.
|
(g)
|
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.
|
(h)
|
The
fair value was assumed to reasonably approximate the carrying amount since
the carrying amount represents the fair value as of the acquisition date
of these lease obligations (2005) less subsequent
amortization.
|
(i)
|
Our
interest in AmeriGas Eagle Propane, L.P. was sold in 2009 and the related
contingent liability was
eliminated.
|
(j)
|
Wendy’s
provided loan guarantees to various lenders on behalf of franchisees
entering into pooled debt facility arrangements for new store development
and equipment financing. Wendy’s has accrued a liability for the fair
value of these guarantees, the calculation for which was based upon a
weighed average risk percentage established at the inception of each
program.
|
The
carrying amounts of current accounts and notes receivable and non-current notes
receivable (excluding the DFR Notes described above) approximated fair value due
to the related allowance for doubtful accounts and notes receivable. The
carrying amounts of accounts payable and accrued expenses and advertising funds
restricted assets and liabilities approximated fair value due to the short-term
maturities of those items.
Valuation
techniques under the accounting guidance related to fair value measurements are
based on observable and unobservable inputs. Observable inputs
reflect readily obtainable data from independent sources, while unobservable
inputs reflect our market assumptions. These inputs are classified
into the following hierarchy:
Level 1 Inputs – Quoted
prices for identical assets or liabilities in active markets.
Level 2 Inputs – Quoted
prices for similar assets or liabilities in active markets; quoted prices for
identical or similar assets or liabilities in markets that are not active; and
model-derived valuations whose inputs are observable or whose significant value
drivers are observable.
Level 3 Inputs – Pricing
inputs are unobservable for the assets or liabilities and include situations
where there is little, if any, market activity for the assets or
liabilities. The inputs into the determination of fair value require
significant management judgment or estimation.
The
following table presents our financial assets and liabilities (other than cash
and cash equivalents) measured at fair value on a recurring basis as of January
3, 2010 by the valuation hierarchy as defined in the fair value
guidance:
|
|
January
3,
|
|
|
Fair
Value Measurements
|
|
|
|
2010
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investment (included in “Prepaid expenses and other current
assets”)
|
|
$ |
263 |
|
|
$ |
263 |
|
|
$ |
- |
|
|
$ |
- |
|
Interest
Rate Swaps (included in “Deferred costs and other assets”)
|
|
|
1,589 |
|
|
|
- |
|
|
|
1,589 |
|
|
|
- |
|
Total
|
|
$ |
1,852 |
|
|
$ |
263 |
|
|
$ |
1,589 |
|
|
$ |
- |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
The
following table presents the fair values for those assets and liabilities
measured at fair value during 2009 on a non-recurring basis. Total
losses include losses recognized from all non-recurring fair value measurements
during the year ended January 3, 2010. See Note 15 for more
information on the impairment of our long-lived assets.
|
|
January
3,
|
|
|
Fair
Value Measurements
|
|
|
|
|
|
|
2010
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties
|
|
$ |
1,619,248 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,619,248 |
|
|
$ |
74,458 |
|
Other
intangible assets
|
|
|
1,392,883 |
|
|
|
- |
|
|
|
- |
|
|
|
1,392,883 |
|
|
|
7,674 |
|
Total
|
|
$ |
3,012,131 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3,012,131 |
|
|
$ |
82,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Taxes
The
(loss) income from continuing operations before income taxes consisted of the
following components:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Domestic
|
|
$ |
(34,438 |
) |
|
$ |
(583,679 |
) |
|
$ |
6,768 |
|
Foreign
|
|
|
14,305 |
|
|
|
2,427 |
|
|
|
(36 |
) |
|
|
$ |
(20,133 |
) |
|
$ |
(581,252 |
) |
|
$ |
6,732 |
|
The
benefit from (provision for) income taxes from continuing operations consisted
of the following components:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
U.S.
Federal
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
State
|
|
|
(10,318 |
) |
|
|
(4,017 |
) |
|
|
(2,036 |
) |
Foreign,
principally Canada
|
|
|
(6,160 |
) |
|
|
(1,965 |
) |
|
|
(387 |
) |
Current
tax provision
|
|
|
(16,478 |
) |
|
|
(5,982 |
) |
|
|
(2,423 |
) |
U.S.
Federal
|
|
|
8,066 |
|
|
|
90,465 |
|
|
|
9,036 |
|
State
|
|
|
28,985 |
|
|
|
14,608 |
|
|
|
1,741 |
|
Foreign,
principally Canada
|
|
|
3,076 |
|
|
|
203 |
|
|
|
- |
|
Deferred
tax benefit
|
|
|
40,127 |
|
|
|
105,276 |
|
|
|
10,777 |
|
Income
tax benefit
|
|
$ |
23,649 |
|
|
$ |
99,294 |
|
|
$ |
8,354 |
|
The
deferred income tax assets and the deferred income tax (liabilities) resulted
from the following components:
|
|
Year
End
|
|
|
|
2009
|
|
|
2008
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Net
operating/capital loss and tax credit carryforwards
|
|
$ |
144,478 |
|
|
$ |
171,909 |
|
Accrued
compensation and related benefits
|
|
|
34,327 |
|
|
|
34,653 |
|
Unfavorable
leases
|
|
|
34,595 |
|
|
|
36,830 |
|
Other
|
|
|
81,449 |
|
|
|
77,612 |
|
Valuation
allowances
|
|
|
(87,231 |
) |
|
|
(80,886 |
) |
Total
deferred tax assets
|
|
|
207,618 |
|
|
|
240,118 |
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible
assets
|
|
|
(471,816 |
) |
|
|
(464,945 |
) |
Owned
and leased fixed assets and related obligations
|
|
|
(110,033 |
) |
|
|
(124,727 |
) |
Gain
on sale of propane business
|
|
|
- |
|
|
|
(34,692 |
) |
Other
|
|
|
(34,750 |
) |
|
|
(53,074 |
) |
Total
deferred tax liabilities
|
|
|
(616,599 |
) |
|
|
(677,438 |
) |
|
|
$ |
(408,981 |
) |
|
$ |
(437,320 |
) |
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
At
January 3, 2010, the Company’s net deferred tax liabilities totaled
$408,981. At December 28, 2008, the Company’s net deferred tax
liabilities totaled $437,320. The decrease in net deferred tax
liabilities is principally the result of recognizing the tax gain on the sale of
our propane business, fixed asset differences including impairments, and credit
carryforwards partially offset by a decrease in deferred tax assets resulting
from the utilization of net operating loss carryforwards.
U.S.
income taxes and foreign withholding taxes are provided on unremitted earnings
of foreign subsidiaries, primarily Canadian, which are not essentially permanent
in duration. As of January 3, 2010, the Company had unremitted
earnings of approximately $9.6 million with a corresponding U.S. deferred income
tax liability of $0.1 million.
The
Wendy’s Merger qualified as a tax-free reorganization. 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, for U.S. Federal
tax purposes there was an ownership change at Wendy’s/Arby’s which places a
limit on the amount of a Company’s net operating losses that can be deducted
annually.
As of
January 3, 2010, the Company had net operating loss carryforwards for U.S.
Federal income tax purposes of approximately $154,902 which expire beginning in
2024. The utilization of loss carryforwards in future federal income tax returns
is subject to annual limitations of approximately $97,100 and $55,565 for 2010
and 2011 respectively. 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. The Company has not
recognized the $42,661 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 and
related valuation allowances principally consisting of:
|
1)
|
As
of January 3, 2010, $199,057 capital loss resulting from Wendy’s sale of
Fresh Enterprises, Inc. and Subsidiaries “Baja Fresh” in
2006. U.S. Federal capital losses may be carried forward
for five years and are subject to certain limitations as a result of the
Wendy’s Merger. As of January 3, 2010, we have provided a full
valuation allowance on the $73,850 deferred tax asset related to this
capital loss carryforward as we believe it is more likely than not that
the capital loss carryforward will expire unused in 2011. As of
December 28, 2008, our capital loss carryforward was $209,860 and the
related full valuation allowance on the deferred tax asset was
$77,663. We utilized a small portion of this capital loss
carryforward to offset capital gains generated subsequent to the merger in
2008. As a result, this valuation allowance was reduced by
$3,265 and this reduction was considered in merger related fair value (see
Note 2).
|
|
2)
|
As
of January 3, 2010, tax credits aggregating $33,310 principally consisting
of foreign tax credits generated in 2008 and jobs credits from 2009, 2008,
and 2007. The tax credits may be carried forward for periods of
10 to 20 years.
|
|
3)
|
State
net operating loss carryforwards subject to various limitations and
carryforward periods that begin expiring in 2010. As of January
3, 2010, we have a deferred tax asset of $25,217 and a valuation allowance
of $11,656 related to these assets. As of December 28, 2008,
our deferred tax asset for state net operating loss carryforwards was
$5,176 and the related valuation allowance was $1,931. Changes
during 2009 in the state net operating loss carryforwards and related
valuation allowances are principally the result of the recognition of an
$18,152 deferred tax asset and an $8,523 valuation allowance for certain
state net operating losses in connection with the fourth quarter 2009
dissolution of our captive insurance company as realization of these net
operating losses is no longer
remote.
|
In
summary, as of January 3, 2010 and December 28, 2008, the Company had valuation
allowances aggregating $87,231 and $80,886 resulting in a change of $6,345 in
2009 as described above. As of December 30, 2007, our valuation
allowance was $0. The 2008 increase due to the Wendy’s Merger was
$77,663 and the remaining increase was due to state deferred tax assets
generated in 2008. In making our determination of the need for
valuation allowances, we reviewed available positive and negative evidence as
well as prudent and feasible tax planning strategies regarding our ability to
realize the benefit of the related deferred tax assets.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
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 is as follows:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit (provision) computed at U.S. Federal statutory
rate
|
|
$ |
7,047 |
|
|
$ |
203,438 |
|
|
$ |
(2,356 |
) |
State
income taxes, net of U.S. Federal income tax effect
|
|
|
2,505 |
|
|
|
6,884 |
|
|
|
(191 |
) |
Previously
unrecognized state net operating losses, net of related valuation
allowance (a)
|
|
|
9,629 |
|
|
|
- |
|
|
|
- |
|
Foreign
tax credits, net of tax on foreign earnings (b)
|
|
|
- |
|
|
|
9,241 |
|
|
|
- |
|
Impairment
of non-deductible goodwill
|
|
|
- |
|
|
|
(99,696 |
) |
|
|
- |
|
Canadian
tax rate changes
|
|
|
2,000 |
|
|
|
- |
|
|
|
- |
|
Non-controlling
interests
|
|
|
(10 |
) |
|
|
(119 |
) |
|
|
(939 |
) |
Loss
on DFR common stock with no tax benefit
|
|
|
- |
|
|
|
(20,259 |
) |
|
|
- |
|
Jobs
tax credits, net
|
|
|
3,792 |
|
|
|
1,805 |
|
|
|
- |
|
Valuation
allowance reductions
|
|
|
1,165 |
|
|
|
- |
|
|
|
- |
|
Non-deductible
expenses
|
|
|
(1,354 |
) |
|
|
(1,921 |
) |
|
|
(2,338 |
) |
Adjustments
related to prior year tax matters
|
|
|
(1,603 |
) |
|
|
(706 |
) |
|
|
2,574 |
|
Previously
unrecognized contingent benefit (c)
|
|
|
- |
|
|
|
- |
|
|
|
12,488 |
|
Other,
net
|
|
|
478 |
|
|
|
627 |
|
|
|
(884 |
) |
|
|
$ |
23,649 |
|
|
$ |
99,294 |
|
|
$ |
8,354 |
|
____________________
(a)
|
In
connection with the fourth quarter 2009 dissolution of our captive
insurance company, the likelihood of realization of certain previously
unrecognized state net operating losses is no longer
remote. Accordingly, an $18,152 deferred tax asset and related
$8,523 partial valuation allowance was
recognized.
|
(b)
|
Includes
previously unrecognized benefit in 2008 of foreign tax credits, net of
foreign income and withholding taxes, on $23,985 repatriation of foreign
earnings.
|
(c)
|
Represents
a previously unrecognized contingent tax benefit related to two related
party deferred compensation trusts.
|
The
Internal Revenue Service (“IRS”) is conducting an examination of the Company’s
2010 and 2009 U.S. Federal income tax years as part of the Compliance Assurance
Process (“CAP”). As part of CAP, tax years are audited on a
contemporaneous basis so that all or most issues are resolved prior to the
filing of the tax return. Wendy’s has been participating in CAP since
its 2006 tax year. The Wendy’s federal income tax returns for 2007
and prior years have been settled. The Company participated in CAP
beginning with the tax period ended December 28, 2008 and this return is
settled. 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 2005 to September 29, 2008 are not currently under
examination.
Certain
of the Company’s state income tax returns from its 2001 fiscal year and forward
remain subject to examination. Various state income tax returns are
currently under examination.
Uncertain
Tax Positions
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Beginning
balance
|
|
$ |
30,321 |
|
|
$ |
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
|
|
|
6,627 |
|
|
|
996 |
|
|
|
387 |
|
Tax
positions of prior years
|
|
|
1,857 |
|
|
|
4,362 |
|
|
|
108 |
|
Reductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
positions of prior years
|
|
|
(4,241 |
) |
|
|
(2,982 |
) |
|
|
(976 |
) |
Settlements
|
|
|
(1,407 |
) |
|
|
(578 |
) |
|
|
(72 |
) |
Lapse
of statute of limitation
|
|
|
(2,139 |
) |
|
|
(559 |
) |
|
|
(338 |
) |
Ending
balance
|
|
$ |
31,018 |
|
|
$ |
30,321 |
|
|
$ |
12,226 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
Included
in the balance of unrecognized tax benefits at January 3, 2010 and December 28,
2008 respectively, are $21,811 and $22,155 (net of U.S. Federal benefit on state
issues) of tax benefits that, if resolved favorably, would reduce the Company’s
tax expense.
During 2010, the Company believes it
is reasonably possible it will reduce unrecognized tax benefits by up to $4,800,
primarily as a result of the completion of certain state tax audits. Increases
in unrecognized tax benefits will result primarily from state tax positions
expected to be taken on tax returns for 2010. We do not expect any unrecognized
tax benefits related to our U.S. Federal income tax for 2010.
The Company recognizes interest
accrued related to unrecognized tax benefits in “Interest expense” and penalties
in “General and administrative expenses”. During 2009, 2008 and 2007,
the Company recognized $(414), $390 and $1,619 of interest (reductions) expense
and $(888), $1,307 and $0 of penalty (reductions) expense, respectively, related
to uncertain tax positions. The Company has approximately $4,262 and $6,157
accrued for interest and $1,026 and $1,914 accrued for penalties as of January
3, 2010 and December 28, 2008, respectively.
Our
common stock and common stock held in treasury activity for 2009, 2008 and 2007
is as follows:
|
Common
Stock
|
|
Treasury
Stock
|
|
2009
|
|
2008
|
|
2007
|
|
2009
|
|
2008
|
|
2007
|
|
Class
B prior to September 29, 2008
Common
Stock subsequent to September 29, 2008
|
|
Common
Stock
|
|
Common
Stock
|
|
Class
B
|
|
Common
Stock
|
|
Class
B
|
Number
of shares at beginning of year
|
470,424
|
|
64,025
|
|
63,656
|
|
1,220
|
|
667
|
|
174
|
|
805
|
|
486
|
Net
effect of Class B conversion
|
-
|
|
29,551
|
|
-
|
|
-
|
|
2
|
|
(2)
|
|
-
|
|
-
|
Stock
issuance related to Wendy’s Merger
|
-
|
|
376,776
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Common
shares issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upon
exercises of stock options, net
|
-
|
|
-
|
|
177
|
|
(524)
|
|
(5)
|
|
-
|
|
(37)
|
|
(76)
|
Upon
grant of restricted stock and for director’s fees
|
-
|
|
16
|
|
226
|
|
(52)
|
|
(63)
|
|
(213)
|
|
(102)
|
|
(483)
|
Repurchase
of common stock for Treasury
|
-
|
|
-
|
|
-
|
|
16,911
|
|
-
|
|
-
|
|
-
|
|
-
|
Other
|
-
|
|
56
|
|
(34)
|
|
(63)
|
|
619
|
|
41
|
|
1
|
|
247
|
Number
of shares at end of year
|
470,424
|
|
470,424
|
|
64,025
|
|
17,492
|
|
1,220
|
|
-
|
|
667
|
|
174
|
Preferred
Stock
There
were 100,000 shares authorized and no shares issued of preferred stock
throughout the 2009, 2008 and 2007 fiscal years.
Restricted
Net Assets of Subsidiaries
Restricted
net assets of consolidated subsidiaries were $2,006,387 representing
approximately 86% of the Company’s consolidated stockholder’s equity as of
January 3, 2010, and consisted of net assets of the Company’s restaurant
business segment which were restricted as to transfer to Wendy’s/Arby’s in the
form of cash dividends, loans or advances under the covenants of the Credit
Agreement.
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,
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
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. The Equity Plans
also provide for the grant of shares of Wendy’s/Arby’s common stock to
non-employee directors. As of January 3, 2010 there were
approximately 20,630 shares of 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 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 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. As such, we
recorded additional compensation expense in 2008 for this amount.
All
discussions below related to option and restricted share activity for prior
years include options or restricted shares for Class B Common Stock which, if
they were still outstanding as of the date of the Wendy’s Merger, represent
options exercisable into Common Stock or restricted Common Stock.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
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, we
converted to a single class of common stock. As such, all stock
options outstanding subsequent to the date of the Wendy’s Merger (including
those under the Wendy’s Plans) are now exercisable for one share of Common Stock
(three shares of Common Stock for Package Options). Summary
information regarding Wendy’s/Arby’s outstanding stock options, including
changes therein, is as follows:
|
|
Package
Options
|
|
|
Common
Stock 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 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 Common Stock 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 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
Granted
during 2009
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
2,346 |
|
|
$ |
4.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
options reinstated
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
374 |
|
|
$ |
3.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
during 2009
|
|
|
- |
|
|
|
|
|
|
$ |
- |
|
|
|
(524 |
) |
|
$ |
3.75 |
|
|
$ |
784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
during 2009
|
|
|
(15 |
) |
|
$ |
19.82 |
|
|
|
|
|
|
|
(5,409 |
) |
|
$ |
8.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 3, 2010
|
|
|
195 |
|
|
$ |
23.82 |
|
|
$ |
- |
|
|
|
22,880 |
|
|
$ |
7.15 |
|
|
$ |
2,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
or expected to vest at January 3, 2010 (a)
|
|
|
195 |
|
|
$ |
23.82 |
|
|
$ |
- |
|
|
|
21,914 |
|
|
$ |
7.21 |
|
|
$ |
10,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
30, 2007
|
|
|
225 |
|
|
$ |
24.04 |
|
|
|
|
|
|
|
153 |
|
|
$ |
16.11 |
|
|
|
|
|
|
|
2,457,326 |
|
|
$ |
12.90 |
|
|
|
|
|
December
28, 2008
|
|
|
210 |
|
|
$ |
23.54 |
|
|
|
|
|
|
|
12,451 |
|
|
$ |
8.60 |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
January
3, 2010
|
|
|
195 |
|
|
$ |
23.82 |
|
|
$ |
- |
|
|
|
12,145 |
|
|
$ |
8.29 |
|
|
$ |
1,861 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
(a)
|
The
weighted average remaining contractual terms for the Package Options and
Common Stock Options that are vested or are expected to vest at January 3,
2010 are 2.1 years and 7.7 years,
respectively.
|
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 2009, 2008
and 2007 (which were all granted at exercise prices equal to the market price of
the Company’s Common Stock or Class B common stock on the grant date)
were as follows:
|
|
Common
Stock Options
|
|
|
Class
B
Options
|
|
2009
|
|
$ |
1.83 |
|
|
|
N/A |
|
2008
|
|
$ |
2.12 |
|
|
$ |
2.20 |
|
2007
|
|
$ |
4.57 |
|
|
$ |
4.52 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
The fair
value of the Company’s stock options on the date of grant and as of the Merger
Date for options assumed in 2008 was calculated utilizing the following weighted
average assumptions:
|
2009
|
|
2008
|
|
2007
|
|
Common
Stock Options
|
|
Class
B Options
|
|
Common
Stock Options
|
|
Class
B Options
|
|
Common
Stock Options
|
|
Class
B Options
|
Risk-free
interest rate
|
2.46%
|
|
N/A
|
|
2.13%
|
|
3.78%
|
|
4.88%
|
|
4.69%
|
Expected
option life in years
|
5.1
|
|
N/A
|
|
6.2
|
|
7.5
|
|
8.4
|
|
7.5
|
Expected
volatility
|
49.6%
|
|
N/A
|
|
47.0%
|
|
36.0%
|
|
20.9%
|
|
26.5%
|
Expected
dividend yield
|
1.35%
|
|
N/A
|
|
1.29%
|
|
2.53%
|
|
2.01%
|
|
2.38%
|
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
January 3, 2010, there was $7,691 of total unrecognized compensation cost
related to nonvested share-based compensation grants which would be recognized
over a weighted-average period of 1.75 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.
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. The exercise prices were reduced by $0.39 for each of the
Package Options and by $0.13 for each of the Common Stock Options and Class B
Options.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
Restricted
Shares
The
Company issues restricted share awards (“RSAs”) as well as restricted share
units (“RSUs”). For the purposes of our disclosures, the term
“Restricted Shares” applies to both RSAs and RSUs collectively unless otherwise
noted.
A summary
of changes in the Company’s nonvested Restricted Shares is as
follows:
|
|
Common
Stock
|
|
|
Class
B Common Stock
|
|
|
|
Shares
|
|
|
Weighted
Average Fair Value
|
|
|
Shares
|
|
|
Weighted
Average Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
(28 |
) |
|
|
10.33 |
|
|
|
(8 |
) |
|
|
15.84 |
|
Conversion
of Class B Common Stock
to
Common Stock
|
|
|
317 |
|
|
|
9.60 |
|
|
|
(317 |
) |
|
|
9.60 |
|
Nonvested
at December 28, 2008
|
|
|
337 |
|
|
|
9.13 |
|
|
|
- |
|
|
$ |
- |
|
Granted
during 2009
|
|
|
1,304 |
|
|
|
4.43 |
|
|
|
|
|
|
|
|
|
Vested
during 2009
|
|
|
(148 |
) |
|
|
9.28 |
|
|
|
|
|
|
|
|
|
Forfeited
during 2009
|
|
|
(12 |
) |
|
|
7.25 |
|
|
|
|
|
|
|
|
|
Nonvested
at January 3, 2010
|
|
|
1,481 |
|
|
$ |
5.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
Instruments of Subsidiaries
Deerfield
had granted membership interests in future profits (the “Profit Interests”) to
certain of its key employees prior to 2007 for which no payments were required
from the employees to acquire the Profit Interests. 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 and the related unrecognized compensation cost was to be recorded as
compensation expense as earned over periods of three or five
years. The vesting of the portion of the Profit Interests scheduled
to vest on February 15, 2008 was accelerated and the remaining unamortized
balance was recognized as compensation expense in 2007.
Prior to
2007, 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 Triarc Deerfield Holdings, LLC (“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 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. On June 29,
2007, the Performance Compensation Subcommittee of the Company’s Board of
Directors, in connection with our corporate restructuring, 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 2007 was $2,240.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
Share-Based
Compensation Expense
Total
share-based compensation expense and related income tax benefit recognized in
the Company’s consolidated statements of operations were as
follows:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Compensation
expense related to stock options
|
|
$ |
12,497 |
|
|
$ |
5,953 |
|
|
$ |
4,271 |
|
Compensation
expense related to the effect of the Conversion on Wendy’s stock
options
|
|
|
- |
|
|
|
1,923 |
|
|
|
- |
|
Compensation
expense related to Restricted Shares
|
|
|
2,797 |
|
|
|
1,247 |
|
|
|
3,479 |
|
Compensation
expense related to the Equity Interests
|
|
|
- |
|
|
|
- |
|
|
|
2,007 |
|
Compensation
expense credited to “Stockholders’ Equity”
|
|
|
15,294 |
|
|
|
9,123 |
|
|
|
9,757 |
|
Compensation
expense related to Restricted Shares that was not credited to
“Stockholders’ Equity” (a)
|
|
|
160 |
|
|
|
- |
|
|
|
- |
|
Compensation
expense related to dividends and related interest on the Restricted Shares
(b)
|
|
|
13 |
|
|
|
6 |
|
|
|
26 |
|
Total
share-based compensation expense included in “General and
administrative”
|
|
|
15,467 |
|
|
|
9,129 |
|
|
|
9,783 |
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax benefit
|
|
|
(5,629 |
) |
|
|
(3,363 |
) |
|
|
(2,946 |
) |
Share-based
compensation expense, net of income tax benefit
|
|
$ |
9,838 |
|
|
$ |
5,766 |
|
|
$ |
6,837 |
|
(a)
|
This amount represents amounts
paid to terminated employees in lieu of receiving vested Restricted Shares
to which they were entitled.
|
(b)
|
Dividends of $25, $65, and $148
that accrued on the Restricted Shares were charged to “Accumulated
deficit/Retained earnings” in 2009, 2008 and 2007,
respectively.
|
The
facilities relocation and corporate restructuring charges are summarized
below:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Wendy’s
Restaurants segment
|
|
$ |
11,096 |
|
|
$ |
3,101 |
|
|
$ |
- |
|
Arby’s
Restaurants segment
|
|
|
(72 |
) |
|
|
120 |
|
|
|
652 |
|
General
corporate
|
|
|
- |
|
|
|
692 |
|
|
|
84,765 |
|
|
|
$ |
11,024 |
|
|
$ |
3,913 |
|
|
$ |
85,417 |
|
The
Company incurred corporate restructuring charges primarily related to severance
in conjunction with the Wendy’s Merger in 2009 and 2008. We do not expect to
incur any additional corporate restructuring charges with respect to the Wendy’s
Merger in 2010.
The
facilities relocation charges incurred and recognized in our Arby’s restaurant
segment for 2008 and 2007 represent additional costs principally related to the
now completed Company combination of its existing restaurant operations
with those of the RTM Restaurant Group (“RTM”) following the acquisition
of RTM in 2005.
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
Chairman and then Chief Executive Officer and the Vice Chairman and then
President and Chief Operation Officer of the Company (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. The fair values of the 2007 Trusts at their
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
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, all
as part of the Corporate Restructuring. The Corporate Restructuring was
completed in 2007.
The
components of facilities relocation and corporate restructuring charges in 2009,
2008 and 2007 and an analysis of related activity in the facilities relocation
and corporate restructuring accrual are as follows:
|
|
2009
|
|
|
|
Balance
December
28, 2008
|
|
|
Provisions
|
|
|
Payments
|
|
|
Balance
January
3, 2010
|
|
|
Total
Expected to be Incurred
|
|
|
Total
Incurred to Date
|
|
Wendy’s restaurant
segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
costs
|
|
$ |
3,101 |
|
|
$ |
11,096 |
|
|
$ |
(8,567 |
) |
|
$ |
5,630 |
|
|
$ |
14,197 |
|
|
$ |
14,197 |
|
Total
Wendy’s restaurant segment
|
|
|
3,101 |
|
|
|
11,096 |
|
|
|
(8,567 |
) |
|
|
5,630 |
|
|
|
14,197 |
|
|
|
14,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arby’s
restaurant segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
relocation costs
|
|
|
72 |
|
|
|
(72 |
)(a) |
|
|
- |
|
|
|
- |
|
|
|
4,579 |
|
|
|
4,579 |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,471 |
|
|
|
7,471 |
|
|
|
|
72 |
|
|
|
(72 |
) |
|
|
- |
|
|
|
- |
|
|
|
12,050 |
|
|
|
12,050 |
|
Non-cash
charges
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
719 |
|
|
|
719 |
|
Total
Arby’s restaurant segment
|
|
|
72 |
|
|
|
(72 |
) |
|
|
- |
|
|
|
- |
|
|
|
12,769 |
|
|
|
12,769 |
|
General
corporate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and retention incentive compensation
|
|
|
962 |
|
|
|
- |
|
|
|
(462 |
) |
|
|
500 |
|
|
|
84,622 |
|
|
|
84,622 |
|
Non-cash
charges
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
835 |
|
|
|
835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
General corporate
|
|
|
962 |
|
|
|
- |
|
|
|
(462 |
) |
|
|
500 |
|
|
|
85,457 |
|
|
|
85,457 |
|
|
|
$ |
4,135 |
|
|
$ |
11,024 |
|
|
$ |
(9,029 |
) |
|
$ |
6,130 |
|
|
$ |
112,423 |
|
|
$ |
112,423 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
|
|
2008
|
|
|
|
Balance
December
30, 2007
|
|
|
Provisions
|
|
|
Payments
|
|
|
Balance
December
28, 2008
|
|
Wendy’s restaurant segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
costs
|
|
$ |
- |
|
|
$ |
3,101 |
|
|
$ |
- |
|
|
$ |
3,101 |
|
Total
Wendy’s restaurant segment
|
|
|
- |
|
|
|
3,101 |
|
|
|
- |
|
|
|
3,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arby’s
restaurant segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
relocation costs
|
|
|
591 |
|
|
|
120 |
(a) |
|
|
(639 |
) |
|
|
72 |
|
Total
Arby’s restaurant segment
|
|
|
591 |
|
|
|
120 |
|
|
|
(639 |
) |
|
|
72 |
|
General
corporate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and retention incentive compensation
|
|
|
12,208 |
|
|
|
692 |
|
|
|
(11,938 |
) |
|
|
962 |
|
Total
General corporate
|
|
|
12,208 |
|
|
|
692 |
|
|
|
(11,938 |
) |
|
|
962 |
|
|
|
$ |
12,799 |
|
|
$ |
3,913 |
|
|
$ |
(12,577 |
) |
|
$ |
4,135 |
|
|
|
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 |
|
____________
(a)
Reflects change in estimate of total cost to be incurred.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
The
following is a summary of our impairment of other long-lived assets losses by
business segment:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Arby’s
restaurants segment:
|
|
|
|
|
|
|
|
|
|
Impairment
of Company-owned restaurants:
|
|
|
|
|
|
|
|
|
|
Properties
|
|
$ |
51,019 |
|
|
$ |
6,906 |
|
|
$ |
1,717 |
|
Intangible
assets
|
|
|
5,494 |
|
|
|
1,096 |
|
|
|
906 |
|
|
|
|
56,513 |
|
|
|
8,002 |
|
|
|
2,623 |
|
Wendy’s
restaurants segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
of Company-owned restaurants:
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties
|
|
|
21,263 |
|
|
|
1,578 |
|
|
|
- |
|
Intangible
assets
|
|
|
2,180 |
|
|
|
- |
|
|
|
- |
|
|
|
|
23,443 |
|
|
|
1,578 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
management segment
|
|
|
- |
|
|
|
- |
|
|
|
4,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
corporate-aircraft
|
|
|
2,176 |
|
|
|
9,623 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
impairment of other long-lived assets
|
|
$ |
82,132 |
|
|
$ |
19,203 |
|
|
$ |
7,045 |
|
The
Arby’s and Wendy’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, (2) additional charges for capital improvements in restaurants
impaired in a prior year which did not subsequently recover, and (3) write-downs
in the carrying value of surplus properties and properties held for
sale.
The
impairment in the asset management segment primarily relates to anticipated
losses on the sale of an internally developed financial model and the impairment
of the value of certain asset management contracts due to their early
termination.
During
2009, we disposed of one of our Company-owned aircraft and recorded additional
impairment in 2009 based on the sale price. At December 28, 2008, we classified
the aircraft as held-for-sale and recorded an impairment charge to reflect its
estimated fair value as a result of an appraisal related to its potential
sale.
All of
these impairment losses represented the excess of the carrying amount over the
fair value of the affected assets and are included in “Impairment of other
long-lived assets.” The fair values of impaired assets discussed above for
the Wendy’s and Arby’s restaurants segments and the asset management segment
are generally estimated based on the present values of the associated cash
flows and on market value with respect to land.
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Interest
income
|
|
$ |
249 |
|
|
$ |
1,285 |
|
|
$ |
9,100 |
|
Distributions,
including dividends
|
|
|
205 |
|
|
|
2,818 |
|
|
|
1,784 |
|
Realized
gains, net
|
|
|
2,948 |
|
|
|
8,460 |
|
|
|
49,829 |
|
Unrealized
(losses) gains, net
|
|
|
- |
|
|
|
(1,128 |
) |
|
|
1,578 |
|
Fee
on early withdrawal of Equities Account
|
|
|
(5,500 |
) |
|
|
- |
|
|
|
- |
|
Other
|
|
|
(910 |
) |
|
|
(1,997 |
) |
|
|
(181 |
) |
|
|
$ |
(3,008 |
) |
|
$ |
9,438 |
|
|
$ |
62,110 |
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Decline
in fair value of DFR common stock
|
|
$ |
- |
|
|
$ |
68,086 |
|
|
$ |
- |
|
Allowance
for doubtful accounts for DFR Notes
|
|
|
- |
|
|
|
21,227 |
|
|
|
- |
|
Decline
in fair value of available-for-sale securities primarily held in the
Equities Account
|
|
|
801 |
|
|
|
13,109 |
|
|
|
1,101 |
|
Decline
in fair value of cost method investments
|
|
|
3,115 |
|
|
|
10,319 |
|
|
|
20 |
|
Decline
in fair value of CDO preferred stock investments
|
|
|
- |
|
|
|
- |
|
|
|
8,788 |
|
|
|
$ |
3,916 |
|
|
$ |
112,741 |
|
|
$ |
9,909 |
|
Prior to
2007, we sold the stock of the companies comprising our former
premium beverage and soft drink concentrate business segments and the stock or
the principal assets of the companies comprising SEPSCO’s former utility and
municipal services and refrigeration business segments. The Company has
accounted for all of these operations as discontinued operations.
The
income from discontinued operations consisted of the following:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Income
(loss) from discontinued operations before income taxes
|
|
$ |
671 |
|
|
$ |
242 |
|
|
$ |
(247 |
) |
Reversals
of tax reserves due to tax settlements
|
|
|
1,143 |
|
|
|
1,701 |
|
|
|
1,144 |
|
(Provision
for) benefit from income taxes
|
|
|
(268 |
) |
|
|
274 |
|
|
|
98 |
|
Income
from discontinued operations, net of income taxes
|
|
$ |
1,546 |
|
|
$ |
2,217 |
|
|
$ |
995 |
|
401(k)
Plans
Subject
to certain restrictions, the Company had 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
could 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 provided for Company matching
contributions of employee contributions up to 6% depending on the respective
plan. Some of these 401(k) Plans also permitted or required profit sharing
contributions. In connection with the matching and profit sharing
contributions, the Company provided $12,694, $4,829 and $600 as compensation
expense in 2009, 2008 and 2007, respectively. Effective January 1,
2010, the 401(k) Plans were combined into one 401(k) plan, which permits
employees to contribute up to 75% of their compensation, subject to certain
limitations. The combined 401(k) plan provides for Company matching
contributions of employee contributions up to 4% of compensation and for
discretionary profit sharing contributions.
Pension
Plans
The
Company had two domestic defined benefit plans which were assumed in connection
with the Wendy’s Merger (the “Wendy’s Pension Plans”). The benefits
under the Wendy’s Pension Plans were frozen prior to the Wendy’s Merger. In
accordance with the terms of the Merger, Wendy’s obtained an actuarial valuation
of the unfunded pension liability as of September 28, 2008. Wendy’s received
approval for the termination of the Wendy’s Pension Plans by the Pension Benefit
Guaranty Corporation and the Internal Revenue Service by the fourth quarter of
2008. We made lump sum distributions and purchased annuities for the
approved termination of the Wendy’s Pension 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 domestic 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.
The
balance of the accumulated benefit obligations and the fair value of these two
plans’ assets at January 3, 2010 was $3,920 and $2,714, respectively. As of
January 3, 2010 each of the two plans had accumulated benefit obligations in
excess of the fair value of the assets of the respective plan. The
Company recognized $243, $121 and $104 in benefit plan expenses included in
“General and administrative” in 2009, 2008 and 2007, respectively, related to
these two defined benefit plans. The Company’s future
required
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
contributions
to the plans are not expected to be material.
Multiemployer
Pension Plan
Prior to
the fourth quarter of 2009, the unionized employees at The New Bakery
Co. of Ohio, Inc. (the "Bakery"), a wholly-owned subsidiary of Wendy's, were
covered by the Bakery and Confectionery Union and Industry International Pension
Fund (the "Union Pension Fund"), an underfunded union sponsored multiemployer
pension plan. Generally, the Bakery had no obligation to this plan
other than to remit contributions based on hours worked by covered, unionized
employees. However, in the fourth quarter of 2009, the Bakery
terminated its participation in the Union Pension Fund and formally notified the
plan’s trustees of its complete withdrawal from that
plan. Accordingly, this decision requires us to assume a withdrawal
liability in accordance with the applicable requirements of the Employee
Retirement Income Security Act, as amended, and we recorded a liability of
$4,975 at that time to reflect this obligation which has been included in “Cost
of sales” and “Accrued expenses and other current liabilities.” The unionized
employees are currently eligible to participate in the Company’s combined 401(k)
plan.
Wendy’s
Executive Plans
In
accordance with the Wendy’s Merger agreement, amounts due under key executive
agreements and supplemental executive retirement plans (the “SERP”) were funded
into a restricted account. The corresponding liabilities were
included in “Accrued expenses and other current liabilities” and “Other
liabilities” and in aggregate, were approximately $6,397 and $26,725 as of
January 3, 2010 and December 28, 2008, respectively.
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.
Rental
expense under operating leases consists of the following
components:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Minimum
rentals
|
|
$ |
151,360 |
|
|
$ |
94,547 |
|
|
$ |
79,484 |
|
Contingent
rentals
|
|
|
12,364 |
|
|
|
4,989 |
|
|
|
2,711 |
|
|
|
|
163,724 |
|
|
|
99,536 |
|
|
|
82,195 |
|
Less
sublease income
|
|
|
(6,212 |
) |
|
|
(4,771 |
) |
|
|
(9,131 |
) |
|
|
$ |
157,512 |
|
|
$ |
94,765 |
|
|
$ |
73,064 |
|
The
Company’s future minimum rental payments and rental receipts, for noncancelable
leases, including rental receipts for leased properties owned by the Company,
having an initial lease term in excess of one year as of January 3, 2010, are as
follows:
|
|
Rental
Payments
|
|
|
Rental
Receipts
|
|
|
|
Sale-Leaseback
Obligations
|
|
|
Capitalized
Leases
|
|
|
Operating
Leases (a)
|
|
|
Sale-Leaseback
Obligations
|
|
|
Capitalized
Leases
|
|
|
Operating
Leases (a)
|
|
|
Owned
Properties
|
|
Fiscal Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
$ |
14,718 |
|
|
$ |
17,709 |
|
|
$ |
155,521 |
|
|
$ |
1,022 |
|
|
$ |
345 |
|
|
$ |
13,080 |
|
|
$ |
7,200 |
|
2011
|
|
|
14,687 |
|
|
|
15,293 |
|
|
|
142,688 |
|
|
|
1,022 |
|
|
|
345 |
|
|
|
11,633 |
|
|
|
7,180 |
|
2012
|
|
|
15,380 |
|
|
|
11,755 |
|
|
|
132,855 |
|
|
|
1,022 |
|
|
|
345 |
|
|
|
9,726 |
|
|
|
7,118 |
|
2013
|
|
|
14,767 |
|
|
|
11,996 |
|
|
|
121,980 |
|
|
|
1,001 |
|
|
|
345 |
|
|
|
7,511 |
|
|
|
6,707 |
|
2014
|
|
|
14,758 |
|
|
|
12,177 |
|
|
|
113,032 |
|
|
|
964 |
|
|
|
345 |
|
|
|
6,361 |
|
|
|
6,456 |
|
Thereafter
|
|
|
152,185 |
|
|
|
110,451 |
|
|
|
1,093,355 |
|
|
|
4,347 |
|
|
|
1,754 |
|
|
|
27,792 |
|
|
|
50,761 |
|
Total minimum
payments
|
|
|
226,495 |
|
|
|
179,381 |
|
|
$ |
1,759,431 |
|
|
$ |
9,378 |
|
|
$ |
3,479 |
|
|
$ |
76,103 |
|
|
$ |
85,422 |
|
Less
amounts representing interest, with interest rates of between 3% and
22%
|
|
|
(101,319 |
) |
|
|
(89,495 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present
value of minimum sale leaseback and capitalized lease
payments
|
|
$ |
125,176 |
|
|
$ |
89,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
______________________
(a)
|
Includes
the rental payments under the lease for the Company’s former corporate
headquarters and of the sublease for
office
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
|
space
on two of the floors covered under the lease to the Management
Company.
|
As of
January 3, 2010, the Company had $124,056 of “Favorable leases,” net of
accumulated amortization, included in “Other intangible assets” and $92,261 of
unfavorable leases included in “Other liabilities,” or $31,795 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 the $31,795 of net favorable leases, net of (1) $31,375 of
Straight-Line Rent and (2) $221 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. Estimated sublease future rental receipts exclude
sublessor rental obligations for closed locations.
The
Company leases properties it owns to third parties. Properties leased to third
parties under operating leases as of January 3, 2010 and December 28, 2008
include:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
26,325 |
|
|
$ |
25,617 |
|
Buildings
and improvements
|
|
|
58,450 |
|
|
|
55,285 |
|
Office,
restaurant and transportation equipment
|
|
|
4,437 |
|
|
|
4,551 |
|
|
|
|
89,212 |
|
|
|
85,453 |
|
Accumulated
depreciation
|
|
|
(9,885 |
) |
|
|
(2,469 |
) |
|
|
$ |
79,327 |
|
|
$ |
82,984 |
|
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.
Guarantees
and Contingent Liabilities
Wendy’s
has guaranteed the performance of certain leases and other obligations primarily
from Company-owned restaurant locations now operated by franchisees amounting to
$81,860. These leases extend through 2030, including all existing
extension or renewal option periods. We have not received any notice
of default related to these leases as of January 3, 2010. 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 amounting to $12,197. These leases expire on various
dates, which extend through 2022, including all existing extension or renewal
option periods.
RTM, a
subsidiary of Wendy’s/Arby’s, guarantees the performance of the lease
obligations of 10 RTM restaurants formerly operated by affiliates of RTM as of
January 3, 2010, (the “Affiliate Lease Guarantees”). The former RTM
stockholders have indemnified us with respect to the guarantee of the remaining
lease obligations. In addition, RTM remains contingently liable for
12 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 $14,500 as of January 3, 2010 including approximately
$12,000 under the Affiliate Lease Guarantees, assuming all scheduled lease
payments have been made by the respective tenants through January 3,
2010. The estimated fair value of the Lease Guarantees as of the date
of the RTM Acquisition was recorded as a liability and 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 $382 included
in “Other liabilities” as of January 3, 2010 with respect to the Lease
Guarantees.
Wendy’s
is self-insured for most domestic workers’ compensation losses and purchases
insurance for general liability and automotive liability losses all subject to
$500 per occurrence self-retention limits. Arby’s purchases insurance
for most domestic workers’ compensation, general liability and automotive
liability losses subject to $500, $100, and $0 self-retention limits,
respectively. Both Wendy’s and Arby’s determine their liabilities for
claims incurred but not reported for the insurance 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. 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
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
for the
aggregate amount of these loans amounted to $25,771 as of January 3,
2010. During 2009, Wendy’s recourse obligation associated with
defaulted loans was not material, and Wendy’s has not entered into any new loan
guarantees since the Merger Date. There remains an unamortized carrying
amount of $592 included in “Other liabilities” as of January 3, 2010 with
respect to the loan guarantees.
Wendy’s/Arby’s,
Wendy’s/Arby’s Restaurants and Wendy’s individually have outstanding letters of
credit of $851, $33,587 and $287, respectively, with various parties as of
January 3, 2010; 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.
Purchase
and Capital Commitments
Beverage
Agreements
Wendy’s
and Arby’s have entered into beverage agreements with certain beverage vendors
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 national advertising funds (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. Any unamortized amounts are included in “Deferred income” and
usage that exceeds estimated amounts are included in “Accounts and notes
receivable.”
Beverage
purchases made by the Company under these various agreements during 2009, 2008
and 2007 were approximately $27,932, $13,908 and $7,524
respectively. Future purchases by the Company under these beverage
purchase requirements are estimated to be approximately $28,614 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 requirement is approximately $249,739 over
the remaining life of the contracts. As of January 3, 2010, $1,081,
net, is due to beverage vendors and included in “Accounts payable” for the
decline in Syrup usage in 2009 over originally estimated annual usage amounts,
and $1,777 included in “Deferred income” relating to the remaining unamortized
upfront fees.
Advertising
Commitments
Arby’s
had purchase commitments of approximately $2,029 related to execution of
advertising strategy, including agency fees and media buy obligations for
2010. 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. All of
Wendy’s advertising commitments at January 3, 2010 were incurred by the Wendy’s
National Advertising Program, Inc.
Capital
Expenditures Commitments
As of
January 3, 2010, the Company has $18,638 of outstanding commitments for capital
expenditures, of which $14,038 is expected to be paid in 2010.
AFA
Dues Subsidy
As of
April 1, 2010 and for the remainder of 2010, the AFA Board has approved a dues
increase based on a tiered rate structure for the payment of the advertising and
marketing service fee ranging between 1.4% and 3.6% of sales. ARG’s
advertising and marketing service fee percentage similarly calculated will be
approximately 2.4% as of April 1, 2010. In addition, ARG has agreed
to partially subsidize the top two rate tiers in 2010 thereby decreasing
franchisees’ effective advertising and marketing service fee
percentages. It is estimated that this subsidy will require payments
by ARG of approximately $4,200 to AFA for 2010.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
Deferred
compensation trusts
Prior to
2007 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 was recognized in 2007 through the settlement date for net increases in
the fair value of the investments in the Deferred Compensation
Trusts. The Company was unable to 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 recognized net investment income from investments
in the Deferred Compensation Trusts of $8,653 in 2007 through the settlement
date. 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. Realized gains, interest income and investment management fees are
included in “Investment (expense) income, net” and deferred compensation expense
is included in “General and administrative.”
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” 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. 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 2009 and 2008, the Company received distributions
of $795 and $2,014, respectively, from the liquidation of certain of the
investments owned by 280 BT. The minority portions of these distributions of
$156 and $402 in 2009 and 2008, respectively, were further distributed to 280
BT’s minority shareholders.
Information
pertaining to the remaining co-investment is as follows:
|
|
280
BT
|
Ownership
percentages at January 3, 2010:
|
|
|
Company
|
|
80.1%
|
Former
officers of the Company
|
|
11.2%
|
Other
|
|
8.7%
|
Sale
of Deerfield capital investments
In
connection with the Deerfield Sale, 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).
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
The
Deerfield Sale was 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 of $170 included in “General and
administrative”, 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.” The severance package was a continuing liability
of Deerfield and, as it was not to be paid by the Company, there is an
offsetting amount included in the gain related to the Deerfield
Sale.
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 “Impairment of other long-lived assets”, 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.
Other
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. The reimbursement for 2007 through July 1,
2007 amounted to $668 and was recognized as a reduction of “General and
administrative.” (See below for discussion of arrangements since that
time).
Agreements
with the Former Executives
In
connection with the Corporate Restructuring, 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”). Prior to 2007, 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. These allocated costs
for 2007 (through June 29, 2007) amounted to $2,515 and were recognized as a
reduction of “General and administrative”. 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 reduced its incentive compensation expense for
2007 through June 29, 2007 by $2,700 for the Management Company’s allocable
portion of the incentive compensation attributable to the Management Company
Employees for the first six months of 2007. 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.
Services
Agreement
In
connection with the Corporate Restructuring, Wendy’s/Arby’s and the Management
Company entered into the Services Agreement, effective June 30, 2007, pursuant
to which the Management Company provided the Company with a range of
professional and strategic services. Under the Services Agreement,
which expired on June 30, 2009 and was superseded by a new services agreement
(the “New Services Agreement”), the Company paid 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 $3,500, $9,500 and $6,000 of
such service fees for 2009, 2008 and 2007, respectively, which are included in
“General and administrative.” Additionally, the Company and the Management
Company entered into an amendment to the Services Agreement, effective as of
December 28, 2007, to pay the Management Company in 2008 additional fees of
$2,750, for services rendered during 2007, which were attributable to the
unanticipated and extensive time commitment of Management Company Employees
during 2007. The additional fees included $1,925 in connection with
the Wendy’s Merger (and included in Wendy’s Merger costs) and $825 related to
the Deerfield Sale which was included in the calculation of the “Gain on sale of
consolidated business.”
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
Equities
Account
Prior to
2007, we invested $75,000 in the Equities Account which was managed by the
Management Company. The Equities Account was invested principally in
equity securities, cash equivalents and equity derivatives of a limited number
of publicly-traded companies. In addition, the Equities Account sold securities
short and invested in market put options in order to lessen the impact of
significant market downturns. 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.
Executive
use of corporate aircraft
In August
2007, the Company entered into time share agreements under which the Principals
and the Management Company used the Company's corporate aircraft in exchange for
payment of the incremental flight and related costs of such
aircraft. Those time share agreements expired during the second
quarter of 2009 and, in the third quarter of 2009, one of the aircraft was sold
to an unrelated third party. Such reimbursements for 2009, 2008 and 2007 (the
period from July 2, 2007 through December 30, 2007) amounted to $553, $3,028,
and $1,095 and have been recognized as a reduction of “General and
administrative.” Refer to our new aircraft lease agreement
below.
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.
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
$157, $153 and $113, in 2009, 2008, and 2007 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. These agreements have been
amended and, effective April 1, 2010, the Management Company will pay the
Company an amount equal to the Company’s rent and other costs related to the use
of the space. The Company recognized $1,886, $1,633 and $680 from the
Management Company under the Subleases for 2009, 2008 and 2007, respectively,
which has been recorded as a reduction of “General and
administrative.”
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.
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 fixtures. The Company
recognized a loss of $835, which is included in “Facilities relocation and
corporate restructuring”, principally reflecting assets for which the fair value
was less than book value.
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, 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, was paid to the Former Executives on December 30,
2007, six months following their June 29, 2007 separation
date.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
All of
the agreements set forth above 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.
New
Services Agreement
Wendy’s/Arby’s
and the Management Company entered into the New Services Agreement which
commenced on July 1, 2009 and will continue until June 30, 2011, unless sooner
terminated. Under the New Services Agreement, the Management Company will assist
us with strategic merger and acquisition consultation, corporate finance and
investment banking services and related legal matters. Pursuant to the terms of
this agreement, we are paying the Management Company a service fee of $250 per
quarter, payable in advance commencing July 1, 2009. In addition, in the event
the Management Company provides substantial assistance to us in connection with
a merger or acquisition, corporate finance and/or similar transaction that is
consummated at any time during the period commencing on the date the New
Services Agreement was executed and ending six months following the expiration
of its term, we will negotiate a success fee to be paid to the Management
Company which is reasonable and customary for such transactions.
We paid
approximately $5,368 in fees for corporate finance advisory services in 2009 to
the Management Company in connection with the issuance of the Senior
Notes.
Withdrawal
Agreement
In June
2009, we and the Management Company entered into a Withdrawal Agreement which
provided that we would be permitted to withdraw all amounts in the Equities
Account on an accelerated basis effective no later than June 26, 2009. Prior to
the Withdrawal Agreement and as a result of an investment management agreement
with the Management Company which was terminated on June 26, 2009, we had not
been permitted to withdraw any amounts from the Equities Account until December
31, 2010, although $47,000 was released from the Equities Account in 2008
subject to an obligation to return that amount to the Equities Account by a
specified date. In consideration for obtaining such Early Withdrawal
right, we agreed to pay the Management Company $5,500, were not required to
return the $47,000 referred to above and were no longer obligated to pay
investment management and incentive fees to the Management Company. The Equities
Account investments were liquidated in June 2009 for $37,401, of which $31,901
was received by us, net of the $5,500 withdrawal fee and for which we realized a
gain of $2,280 in 2009, all included in “Investment (expense) income,
net.”
Liquidation
Services Agreement
In June
2009, Wendy’s/Arby’s and the Management Company entered into a Liquidation
Services Agreement whereby, the Management Company will assist us in
the sale, liquidation or other disposition of the Legacy Assets, which are not
related to the Equities Account. As of the date of the Liquidation
Services Agreement, the Legacy Assets were valued at the Target
Amount. The Liquidation Services Agreement, which expires June 30,
2011, provides that we will pay the Management Company a fee of $900 in two
installments, which is being amortized over the term of the agreement. The first
installment of $450 was paid in 2009 and $239 was amortized and recorded in
“General and administrative.” In addition, in the event that any or
all of the Legacy Assets are sold, liquidated or otherwise disposed of and the
aggregate net proceeds to us are in excess of the Target Amount, then we will
pay the Management Company a success fee equal to 10% of the aggregate net
proceeds in excess of the Target Amount.
Aircraft
Lease Agreement
Wendy’s/Arby’s
and TASCO, LLC (an affiliate of the Management Company) (“TASCO”) entered into
an aircraft lease agreement (the “Aircraft Lease Agreement”) for an aircraft
that was previously under the time share agreement mentioned
above. The Aircraft Lease Agreement provides that the Company will
lease such corporate aircraft to TASCO from July 1, 2009 until June 30, 2010.
The Aircraft Lease Agreement provides that TASCO will pay $10 per month for such
aircraft plus substantially all operating costs of the aircraft including all
costs of fuel, inspection, servicing and storage, as well as operational and
flight crew costs relating to the operation of the aircraft, and all transit
maintenance costs and other maintenance costs required as a result of TASCO’s
usage of the aircraft. We will continue to be responsible for calendar-based
maintenance and any extraordinary and unscheduled repairs and/or maintenance for
the aircraft, as well as insurance and other costs. The Aircraft Lease Agreement
may be terminated by us without penalty in the event we sell the aircraft to a
third party, subject to a right of first refusal in favor of the Management
Company with respect to such a sale.
The
agreements entered into during 2009 discussed above were negotiated and approved
by the Audit Committee of our Board of Directors, which was advised in the
process by independent outside counsel.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
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 reflected such payment as an increase in
“Goodwill.”
Charitable
contributions to The Arby’s Foundation Inc.
During
2009 and 2008 the Company paid $500 of expenses on behalf of 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,
primarily utilizing funds reimbursed to it by one of the beverage companies used
by Arby’s as provided by their contract. In 2007 the Company made charitable
contributions of $575 to the Foundation. All such amounts are
included in “General and administrative.” The Company did not make
any charitable contributions to the Foundation in 2009 or 2008.
Charitable
contributions to the Dave Thomas Foundation for Adoption
In 2008,
the Company pledged $1,000 to be paid in equal annual installments over a five
year period to be donated to the Dave Thomas Foundation for Adoption, a related
party. Payments of $200 were made in 2009 and 2008. The amount pledged was
recorded in “General and administrative” in 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 as of January 3, 2010 and
December 28, 2008, 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 $6,240 and $1,801 in royalties and $4,633 and $1,339
in advertising fees in 2009 and 2008, respectively, from Cedar Enterprises and
its affiliates as a franchisee of Wendy’s. Cedar Enterprises, Inc. and its
affiliates also received $175 and $75 in remodeling incentives in 2009 and 2008
(the period from September 29, 2008 through December 28, 2008), respectively,
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, at the time, were operators of 44
and 16 Wendy's restaurants, respectively. Mr. Karam disposed of his
interests in these companies effective November 5, 2008.
Supply
chain relationship agreement
During
the 2009 fourth quarter, Wendy’s and its franchisees entered into a purchasing
co-op relationship agreement (the “Co-op Agreement”) to establish a new Wendy’s
purchasing co-op, Quality Supply Chain Co-op, Inc. (“QSCC”). QSCC now manages
food and related product purchases and distribution services for the Wendy’s
system in the United States and Canada. Through QSCC, Wendy’s and
Wendy’s franchisees purchase food, proprietary paper and operating supplies
under national contracts with pricing based upon total system
volume.
QSCC’s
supply chain management will facilitate continuity of supply and provide
consolidated purchasing efficiencies while monitoring and seeking to minimize
possible obsolete inventory throughout the North American supply chain. The
system’s purchasing function for 2009 and prior was performed and paid for by
Wendy’s. In order to facilitate the orderly transition of the 2010 purchasing
function for North American operations, Wendy’s transferred certain contracts,
assets and certain Wendy’s purchasing employees to QSCC in the first quarter of
2010. Pursuant to the terms of the Co-op Agreement, Wendy’s is
required to pay $15,500 to QSCC over an 18 month period in order to provide
funding for start-up costs, operating expenses and cash reserves. Future
operations will be funded by all members of QSCC, including Wendy’s and its
franchisees. The required payments by
Wendy’s under the Co-op Agreement were expensed in the fourth quarter of 2009
and included in “General and administrative.” Effective January 4,
2010, the QSCC will be leasing 9,333 square feet of office space from Wendy’s
for a two year period for an average annual rental of $113 with five one-year
renewal options.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
Subleases
with ARCOP and The Arby’s Foundation Inc
ARCOP,
the independent Arby’s purchasing cooperative, and the Foundation subleased
approximately 2,680 and 3,800 square feet, respectively, of the corporate
headquarters office space from ARG in 2009 and 2008. In 2007, ARCOP subleased
approximately 2,680 square feet and the Foundation subleased approximately 5,000
square feet of office space from ARG. The Company has received $106, $111, and
$106 of sublease income from ARCOP in 2009, 2008, and 2007, respectively, and
$107, $116, and $117 of sublease income from the Foundation in 2009, 2008, and
2007, respectively.
Revolving
credit facilities
On
December 31, 2009, AFA entered into a revolving loan agreement with ARG.
This agreement, which provided for ARG to make revolving loans of up to $5,500
to AFA, was amended on February 25, 2010 to provide for revolving loans up to
$14,500. Under the terms of this agreement; outstanding amounts are due
through April 4, 2011 and bear interest at 7.5%. As of January 3, 2010,
the outstanding balance under this agreement was $5,089.
We are
involved in litigation and claims incidental to our current and prior
businesses. We have reserves for all of our legal and environmental
matters aggregating $6,262 as of January 3, 2010. 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 to other local and regional
advertising programs.
Restricted assets and related
liabilities of the Advertising Funds at January 3, 2010 and December 28, 2008
are as follows:
|
|
2009
|
|
|
2008
|
|
Cash
and cash equivalents
|
|
$ |
21,856 |
|
|
$ |
29,270 |
|
Accounts
and notes receivable
|
|
|
42,195 |
|
|
|
39,976 |
|
Other
assets
|
|
|
16,425 |
|
|
|
11,893 |
|
Total
assets
|
|
$ |
80,476 |
|
|
$ |
81,139 |
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
52,514 |
|
|
$ |
32,220 |
|
Accrued
expenses and other current liabilities
|
|
|
41,906 |
|
|
|
54,457 |
|
Member’s
deficit
|
|
|
(13,944 |
) |
|
|
(5,538 |
) |
Total
liabilities and deficit
|
|
$ |
80,476 |
|
|
$ |
81,139 |
|
The
Company’s advertising expenses in 2009, 2008 and 2007 totaled $182,008,
$110,849, and $79,270, 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, 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).
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
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, Pennsylvania, Ohio, and Texas.
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 Bakery 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 27 states, with the largest
number in Michigan, Ohio, Indiana, Florida, and Pennsylvania. Arby’s restaurants
also 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.
We had no
customers which accounted for 10% or more of consolidated revenues in 2009, 2008
or 2007. As of January 3, 2010, the Wendy’s restaurants segment has one main
in-line distributor of food, packaging and beverage products, excluding produce
and breads, that services approximately 57% of its Company-owned and franchised
restaurants and two additional in-line distributors that, in the aggregate,
service approximately 23% of its Company-owned and franchised restaurants. As of
January 3, 2010, Arby’s restaurants segment has one main in-line distributor of
food, packaging and beverage products, excluding produce, breads and beverage
products, that services approximately 46% of Arby’s Company-owned and franchised
restaurants and four additional in-line distributors that, in the aggregate,
service approximately 45% of Arby’s 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, 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.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
The
following is a summary of the Company’s segment information:
|
|
Wendy’s
|
|
|
Arby’s
|
|
|
|
|
|
|
|
2009
|
|
restaurants
|
|
|
restaurants
|
|
|
Corporate
|
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
2,134,242 |
|
|
$ |
1,064,106 |
|
|
$ |
- |
|
|
$ |
3,198,348 |
|
Franchise
revenues
|
|
|
302,853 |
|
|
|
79,634 |
|
|
|
- |
|
|
|
382,487 |
|
|
|
|
2,437,095 |
|
|
|
1,143,740 |
|
|
|
- |
|
|
|
3,580,835 |
|
Depreciation
and amortization
|
|
|
128,048 |
|
|
|
56,188 |
|
|
|
6,015 |
|
|
|
190,251 |
|
Operating
profit (loss)
|
|
$ |
167,753 |
|
|
$ |
(29,248 |
) |
|
$ |
(26,529 |
) |
|
|
111,976 |
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(126,708 |
) |
Investment
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,008 |
) |
Other
than temporary losses on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,916 |
) |
Other
income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,523 |
|
Loss
from continuing operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(20,133 |
) |
|
|
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
profit (loss)
|
|
$ |
30,788 |
|
|
$ |
(395,304 |
) |
|
$ |
(49,134 |
) |
|
|
(413,650 |
) |
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67,009 |
) |
Investment
income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,438 |
|
Other
than temporary losses on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(112,741 |
) |
Other
income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,710 |
|
Loss
from continuing operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(581,252 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arby’s
|
|
|
Asset
|
|
|
|
|
|
|
|
2007
|
|
restaurants
|
|
|
management
|
|
|
Corporate
|
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
1,113,436 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,113,436 |
|
Franchise
revenues
|
|
|
86,981 |
|
|
|
- |
|
|
|
- |
|
|
|
86,981 |
|
Asset
management and related fees
|
|
|
- |
|
|
|
63,300 |
|
|
|
- |
|
|
|
63,300 |
|
|
|
|
1,200,417 |
|
|
|
63,300 |
|
|
|
- |
|
|
|
1,263,717 |
|
Depreciation
and amortization
|
|
|
56,909 |
|
|
|
4,951 |
|
|
|
4,417 |
|
|
|
66,277 |
|
Operating
profit (loss)
|
|
$ |
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,038 |
) |
Income
from continuing operations before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
for our equity investments in TimWen and Deerfield are included in the Wendy’s
restaurants and Asset management segments, respectively. Investment expense,
net, of Deerfield was $7,522 in 2007 through the date of the Deerfield
Sale. Operating profit of the Asset Management segment for 2007
included the gain on the Deerfield Sale of $40,193.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
In the
first quarter of 2009, Wendy’s/Arby’s began charging the restaurant segments for
support services based upon budgeted segment revenues. Prior to that date, the
restaurant segments had directly incurred such costs. Commencing with the second
quarter of 2009, Wendy’s/Arby’s established a shared service center in Atlanta
and allocated its operating costs to the restaurant segments based also on
budgeted segment revenues.
|
|
Wendy’s
|
|
|
Arby’s
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
restaurants
|
|
|
restaurants
|
|
|
Corporate
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
3,996,371 |
|
|
$ |
562,192 |
|
|
$ |
2,794,920 |
|
|
$ |
(2,378,067 |
) |
|
$ |
4,975,416 |
|
|
|
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 |
|
|
|
Wendy’s
|
|
|
Arby’s
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
restaurants
|
|
|
restaurants
|
|
|
Corporate
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short
term investment
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
263 |
|
|
$ |
- |
|
|
$ |
263 |
|
Long
term investments
|
|
|
102,140 |
|
|
|
- |
|
|
|
4,880 |
|
|
|
- |
|
|
|
107,020 |
|
Total
investments
|
|
$ |
102,140 |
|
|
$ |
- |
|
|
$ |
5,143 |
|
|
$ |
- |
|
|
$ |
107,283 |
|
|
|
Wendy’s
|
|
|
Arby’s
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
restaurants
|
|
|
restaurants
|
|
|
Corporate
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short
term investment
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
162 |
|
|
$ |
- |
|
|
$ |
162 |
|
Long
term investments
|
|
|
96,523 |
|
|
|
- |
|
|
|
36,529 |
|
|
|
- |
|
|
|
133,052 |
|
Total
investments
|
|
$ |
96,523 |
|
|
$ |
- |
|
|
$ |
36,691 |
|
|
$ |
- |
|
|
$ |
133,214 |
|
|
|
Wendy’s
|
|
|
Arby’s
|
|
|
Asset
|
|
|
|
|
|
|
|
|
|
restaurants
|
|
|
restaurants
|
|
|
management
|
|
|
Corporate
(a)
|
|
|
Total
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
capital expenditures
|
|
$ |
55,155 |
|
|
$ |
29,646 |
|
|
$ |
- |
|
|
$ |
17,113 |
|
|
$ |
101,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
capital expenditures
|
|
$ |
33,650 |
|
|
$ |
72,274 |
|
|
$ |
- |
|
|
$ |
1,065 |
|
|
$ |
106,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
capital expenditures
|
|
$ |
- |
|
|
$ |
72,883 |
|
|
$ |
41 |
|
|
$ |
66 |
|
|
$ |
72,990 |
|
________________________
(a) The
corporate capital expenditures in 2009 are primarily related to the
establishment of our shared services center.
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
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
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Wendy’s
restaurants
|
|
$ |
2,190,003 |
|
|
$ |
233,359 |
|
|
$ |
13,733 |
|
|
$ |
2,437,095 |
|
Arby’s
restaurants
|
|
|
1,140,860 |
|
|
|
2,725 |
|
|
|
155 |
|
|
|
1,143,740 |
|
Consolidated
revenue
|
|
$ |
3,330,863 |
|
|
$ |
236,084 |
|
|
$ |
13,888 |
|
|
$ |
3,580,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wendy’s
restaurants
|
|
$ |
1,114,057 |
|
|
$ |
63,393 |
|
|
$ |
32 |
|
|
$ |
1,177,482 |
|
Arby’s
restaurants
|
|
|
419,748 |
|
|
|
7 |
|
|
|
- |
|
|
|
419,755 |
|
General
corporate
|
|
|
22,011 |
|
|
|
- |
|
|
|
- |
|
|
|
22,011 |
|
Consolidated
assets
|
|
$ |
1,555,816 |
|
|
$ |
63,400 |
|
|
$ |
32 |
|
|
$ |
1,619,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$ |
1,727,931 |
|
|
$ |
42,388 |
|
|
$ |
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
The table below sets forth summary
unaudited consolidated quarterly financial information for 2009 and
2008. The Company reports on a fiscal year typically consisting of 53
or 52 weeks ending on the Sunday closest to December 31. With the
exception of the fourth quarter of 2009 which had 14 weeks, the remainder of the
Company’s fiscal quarters in 2009 and 2008 contained 13
weeks. 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.
|
|
2009
Quarter Ended
|
|
|
|
March
29 (b)
|
|
|
June
28 (b)
|
|
|
September
27 (b)
|
|
|
January
3, 2010 (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
863,984 |
|
|
$ |
912,687 |
|
|
$ |
903,221 |
|
|
$ |
900,943 |
|
Cost
of sales
|
|
|
675,942 |
|
|
|
686,462 |
|
|
|
684,071 |
|
|
|
682,009 |
|
Operating
profit (loss)
|
|
|
13,934 |
|
|
|
56,507 |
|
|
|
56,822 |
|
|
|
(15,287 |
) |
(Loss)
income from continuing operations
|
|
|
(10,924 |
) |
|
|
14,892 |
|
|
|
14,266 |
|
|
|
(14,718 |
) |
Income
from discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
422 |
|
|
|
1,124 |
|
Net
(loss) income
|
|
|
(10,924 |
) |
|
|
14,892 |
|
|
|
14,688 |
|
|
|
(13,594 |
) |
Basic
and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock (a)
|
|
$ |
(.02 |
) |
|
$ |
.03 |
|
|
$ |
.03 |
|
|
$ |
(.03 |
) |
Discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock (a)
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Net
(loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock (a)
|
|
$ |
(.02 |
) |
|
$ |
.03 |
|
|
$ |
.03 |
|
|
$ |
(.03 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
Quarter Ended
|
|
|
|
March
30 (c)
|
|
|
June
29 (c)
|
|
|
September
28 (c)
|
|
|
December
28 (c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
302,854 |
|
|
$ |
313,014 |
|
|
$ |
310,371 |
|
|
$ |
896,522 |
|
Cost
of sales
|
|
|
233,445 |
|
|
|
244,992 |
|
|
|
239,880 |
|
|
|
697,217 |
|
Operating
profit (loss)
|
|
|
8,057 |
|
|
|
8,248 |
|
|
|
3,797 |
|
|
|
(433,752 |
) |
(Loss)
income from continuing operations
|
|
|
(67,471 |
) |
|
|
(6,905 |
) |
|
|
(13,366 |
) |
|
|
(394,216 |
) |
Income
from discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
1,219 |
|
|
|
998 |
|
Net
(loss) income
|
|
|
(67,471 |
) |
|
|
(6,905 |
) |
|
|
(12,147 |
) |
|
|
(393,218 |
) |
Basic
and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock (a)
|
|
$ |
(.73 |
) |
|
$ |
(.07 |
) |
|
$ |
(.14 |
) |
|
$ |
(.84 |
) |
Class
B common stock
|
|
|
(.73 |
) |
|
|
(.07 |
) |
|
|
(.14 |
) |
|
|
N/A |
|
Discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock (a)
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
.01 |
|
|
$ |
- |
|
Class
B common stock
|
|
|
- |
|
|
|
- |
|
|
|
.01 |
|
|
|
N/A |
|
Net
(loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock (a)
|
|
$ |
(.73 |
) |
|
$ |
(.07 |
) |
|
$ |
(.13 |
) |
|
$ |
(.84 |
) |
Class
B common stock
|
|
|
(.73 |
) |
|
|
(.07 |
) |
|
|
(.13 |
) |
|
|
N/A |
|
__________________________
(a)
|
Basic
and diluted (loss) income per share amounts for the quarters have been
calculated separately on a consistent basis with the annual
calculations. 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 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.
Diluted
loss per share for the first and fourth quarters in 2009 and for all quarters in
2008 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.
(b)
|
The
operating profit (loss) was materially affected by impairment of other
long-lived assets in 2009. The impact of the impairment of
other long-lived assets on net (loss) income for the first, second, third
and fourth quarters, was ($4,266), ($5,394), ($9,627) and ($31,635),
respectively, after income tax benefits of $2,614, $3,306, $5,901 and
$19,389, respectively.
|
WENDY’S/ARBY’S
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(In
Thousands Except Per Share Amounts)
(c) The
operating (loss) profit was materially affected by goodwill impairment of
$460,075 for the fourth quarter of 2008. Also, the effect on net (loss) income
for the first, second, third and fourth quarters of 2008 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.
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, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Rules 13a-15(e)
or
15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)), as of January 3, 2010. Based on such evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that as of January
3, 2010, our disclosure controls and procedures were effective in (1) recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by us in the reports that we file or submit under the Exchange
Act and (2) ensuring that information required to be disclosed by us in such
reports is accumulated and communicated to our management, including our Chief
Executive Officer and our Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
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, under the supervision and with
the participation of our Chief Executive Officer and Chief Financial Officer,
carried out an assessment of the effectiveness of our internal control over
financial reporting as of January 3, 2010. 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).
Based on
our assessment of the system of internal control, management believes that as of
January 3, 2010, our internal control over financial reporting was
effective.
Our
independent registered public accounting firm, Deloitte & Touche LLP, has
issued an attestation report dated March 3, 2010, 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 the integration activities,
Wendy’s/Arby’s Group, Inc. controls and procedures are being incorporated into
this acquired business. During the fourth quarter of 2009, an additional phase
of the integration of Wendy’s accounting systems was successfully completed. The
integrated accounting system was used for the preparation of financial
statements and other information presented in this Annual Report on Form 10-K.
We expect further integration of Wendy's processes and systems during
2010.
There
were no other changes in our internal control over financial reporting made
during the quarter that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Inherent
Limitations on Effectiveness of Controls
There are
inherent limitations in the effectiveness of any control system, including the
potential for human error and the circumvention or overriding of the controls
and procedures. Additionally, judgments in decision-making can be
faulty and breakdowns can occur because of simple error or
mistake. An effective control system can provide only reasonable, not
absolute, assurance that the control objectives of the system are adequately
met. Accordingly, our management, including our Chief Executive
Officer and Chief Financial Officer, does not expect that our control system can
prevent or detect all error or fraud. Finally, projections of any
evaluation or assessment of effectiveness of a control system to future periods
are subject to the risks that, over time, controls may become inadequate because
of changes in an entity’s operating environment or deterioration in the degree
of compliance with policies or procedures.
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 January 3, 2010, based on criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. 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 January 3, 2010, 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
and financial statement schedule as of and for the year ended January 3, 2010
and our report dated March 3, 2010 expressed an unqualified opinion on those
financial statements and financial statement schedule.
/s/
Deloitte & Touche LLP
Atlanta,
Georgia
March 3,
2010
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 May 3, 2010 (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:
Schedule I
– Condensed Balance Sheets (Parent Company Only) – as of January 3, 2010 and
December 28, 2008; Condensed Statements of Operations (Parent Company Only)
– for the fiscal years ended January 3, 2010, December 28, 2008 and
December 30, 2007; Condensed Statements of Cash Flows (Parent Company Only)
– for the fiscal years ended January 3, 2010, December 28, 2008 and
December 30, 2007.
All other
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
|
Amended
and Restated Certificate of Incorporation of Wendy’s/Arby’s Group, Inc.,
as filed with the Secretary of State of the State of Delaware on
May 28, 2009, incorporated herein by reference to Exhibit 3.1 to
Wendy’s/Arby’s Group’s Current Report on Form 8-K dated June 1, 2009 (SEC
file no. 001-02207).
|
3.2
|
Amended
and Restated By-Laws of Wendy’s/Arby’s Group, Inc., as amended and
restated as of May 28, 2009, incorporated herein by reference to
Exhibit 3.2 to Wendy’s/Arby’s Group’s Current Report on Form 8-K dated
June 1, 2009 (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).
|
4.5
|
Indenture,
dated as of June 23, 2009, among Wendy’s/Arby’s Restaurants, LLC, the
guarantors named therein and U.S. Bank National Association, as Trustee,
incorporated herein by reference to Exhibit 4.1 to Wendy’s/Arby’s Group’s
Form 10-Q for the quarter ended June 28, 2009 (SEC file no.
001-02207).
|
4.6
|
Registration
Rights Agreement, dated as of June 23, 2009, among Wendy’s/Arby’s
Restaurants, LLC, the guarantors named therein and the initial purchasers
named therein, incorporated herein by reference to Exhibit 4.2 to
Wendy’s/Arby’s Group’s Form 10-Q for the quarter ended June 28, 2009 (SEC
file no. 001-02207).
|
4.7
|
Supplemental
Indenture, dated as of July 8, 2009, among Wendy’s/Arby’s Restaurants,
LLC, the guarantors named therein and U.S. Bank National Association, as
Trustee, incorporated herein by reference to Exhibit 4.3 to Wendy’s/Arby’s
Group’s Form 10-Q for the quarter ended June 28, 2009 (SEC file no.
001-02207).
|
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
|
Wendy’s/Arby’s
Group, Inc. Amended and Restated 2002 Equity Participation Plan, as
amended, incorporated herein by reference to Exhibit 10.5 to
Wendy’s/Arby’s Group’s Form 10-K for the year ended December 28, 2008 (SEC
file no. 001-02207).**
|
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
|
Form
of Restricted Stock Agreement under the Wendy’s/Arby’s Group, Inc. Amended
and Restated 2002 Equity Participation Plan, as amended, incorporated
herein by reference to Exhibit 10.7 to Wendy’s/Arby’s Group’s Form 10-K
for the year ended December 28, 2008 (SEC file no.
001-02207).**
|
10.8
|
Form
of Non-Employee Director Restricted Stock Award Agreement under the
Wendy’s/Arby’s Group, Inc. Amended and Restated 2002 Equity Participation
Plan, incorporated herein by reference to Exhibit 10.7 to Wendy’s/Arby’s
Group’s Form 10-Q for the quarter ended June 28, 2009 (SEC file no.
001-02207).**
|
10.9
|
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 10.1 to Wendy’s/Arby’s Group’s
Form 10-Q for the quarter ended September 27, 2009 (SEC file no.
001-02207).**
|
10.10
|
Form
of Restricted Share Unit Award Agreement under the Wendy’s Arby’s Group,
Inc. Amended and Restated 2002 Equity Participation Plan, as amended,
incorporated herein by reference to Exhibit 10.2 to Wendy’s/Arby’s Group’s
Form 10-Q for the quarter ended September 27, 2009 (SEC file no.
001-02207).
|
10.11
|
1999
Executive Bonus Plan, incorporated herein by reference to Exhibit A to
Triarc’s 1999 Proxy Statement (SEC file no.
001-02207).**
|
10.12
|
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).**
|
10.13
|
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).**
|
10.14
|
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).**
|
10.15
|
Amendments
to the Wendy’s International, Inc. 2003 Stock Incentive Plan, incorporated
herein by reference to Exhibit 10.12 to Wendy’s/Arby’s Group’s Form 10-K
for the year ended December 28, 2008 (SEC file no.
001-02207).**
|
10.16
|
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).**
|
10.17
|
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).**
|
10.18
|
Amendments
to the Wendy’s International, Inc. 2007 Stock Incentive Plan, incorporated
herein by reference to Exhibit 10.15 to Wendy’s/Arby’s Group’s Form 10-K
for the year ended December 28, 2008 (SEC file no.
001-02207).**
|
10.19
|
Form
of Stock Option Award Letter for U.S. Grantees under the Wendy’s
International, Inc. 2007 Stock Incentive Plan, incorporated herein by
reference to Exhibit 10.3 to Wendy’s/Arby’s Group’s Form 10-Q for the
quarter ended September 27, 2009 (SEC file no.
001-02207).**
|
10.20
|
Form
of Stock Unit Award Agreement under the Wendy’s International, Inc. 2007
Stock Incentive Plan, incorporated herein by reference to Exhibit 10.4 to
Wendy’s/Arby’s Group’s Form 10-Q for the quarter ended September 27, 2009
(SEC file no. 001-02207).**
|
10.21
|
Form
of letter amending non-qualified stock options granted under the Wendy’s
International, Inc. 2007 Stock Incentive Plan on May 1, 2007 and May 1,
2008 to certain former directors of Wendy’s International, Inc.
incorporated herein by reference to Exhibit 10.5 to Wendy’s/Arby’s Group’s
Form 10-Q for the quarter ended September 27, 2009 (SEC file no.
001-02207).**
|
10.22
|
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).**
|
10.23
|
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).**
|
10.24
|
|
10.25
|
|
10.26
|
Wendy’s/Arby’s
Group, Inc. 2009 Directors’ Deferred Compensation Plan, effective as of
May 28, 2009, incorporated herein by reference to Exhibit 10.6 to
Wendy’s/Arby’s Group’s Form 10-Q for the quarter ended June 28, 2009 (SEC
file no. 001-02207).**
|
10.27
|
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 herein 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).
|
10.28
|
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 herein 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).
|
10.29
|
Amendment
No. 1 to Amended and Restated Credit Agreement and Amended and Restated
Pledge and Security Agreement, dated as of June 10, 2009, incorporated
herein by reference to Exhibit 10.1 to Wendy’s/Arby’s Group’s Current
Report on Form 8-K dated June 10, 2009 (SEC file no.
001-02207).
|
10.30
|
Form
of Increase Joinder dated as of March 17, 2009 among Arby’s Restaurant
Group, Inc., Wendy’s International Holdings, Inc., Arby’s Restaurant
Holdings, LLC, Wendy’s International, Inc., Citicorp North America, Inc.,
The Huntington National Bank, Fifth Third Bank, Wells Fargo Bank, National
Association and Bank of America, N.A., incorporated herein by reference to
Exhibit 10.1 to Wendy’s/Arby’s Groups’s Current Report on Form 8-K filed
on March 20, 2009 (SEC file no. 001-02207).
|
10.31
|
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).
|
10.32
|
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).
|
10.33
|
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).
|
10.34
|
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).
|
10.35
|
Withdrawal
Agreement dated June 10, 2009 between TCMG-MA, LLC and Trian Fund
Management, L.P., incorporated herein by reference to Exhibit 10.3 to
Wendy’s/Arby’s Group’s Current Report on Form 8-K dated June 11, 2009 (SEC
file no. 001-02207).
|
10.36
|
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).**
|
10.37
|
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).**
|
10.38
|
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).**
|
10.39
|
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).**
|
10.40
|
Agreement
dated June 10, 2009 between Wendy’s/Arby’s Group, Inc. and Trian Fund
Management, L.P., incorporated herein by reference to Exhibit 10.1 to
Wendy’s/Arby’s Group’s Current Report on Form 8-K dated June 11, 2009 (SEC
file no. 001-02207).
|
10.41
|
Liquidation
Services Agreement dated June 10, 2009 between Wendy’s/Arby’s Group, Inc.
and Trian Fund Management, L.P., incorporated herein by reference to
Exhibit 10.2 to Wendy’s/Arby’s Group’s Current Report on Form 8-K dated
June 11, 2009 (SEC file no. 001-02207).
|
10.42
|
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).
|
10.43
|
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).
|
10.44
|
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).
|
10.45
|
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).
|
10.46
|
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).
|
10.47
|
Aircraft
Lease Agreement dated June 10, 2009 between Wendy’s/Arby’s Group, Inc. and
TASCO, LLC., incorporated herein by reference to Exhibit 10.4 to
Wendy’s/Arby’s Group’s Current Report on Form 8-K dated June 11, 2009 (SEC
file no. 001-02207).
|
10.48
|
Registration
Rights Agreement dated as of April 23, 1993, between DWG Corporation and
DWG Acquisition Group, L.P., incorporated herein by reference to Exhibit
10.36 to Wendy’s/Arby’s Group’s Annual Report on Form 10-K for the fiscal
year ended December 28, 2008 (SEC file no. 001-02207).
|
10.49
|
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).
|
10.50
|
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).
|
10.51
|
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).
|
10.52
|
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 herein 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).
|
10.53
|
Amendment No. 1 to Agreement,
dated as of April 1, 2009, among the Company, 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., Trian Fund
Management GP, LLC, Nelson Peltz, Peter W. May and Edward P.
Garden, incorporated herein by reference to Exhibit 10.2 to
Wendy’s/Arby’s Group’s Current Report on Form 8-K filed on April 2, 2009
(SEC file no. 001-02207).
|
10.54
|
Consulting
and Employment Agreement dated July 25, 2008 between Triarc Companies,
Inc. and J. David Karam, incorporated herein by reference to Exhibit 99.1
to Triarc’s Current Report on Form 8-K dated July 25, 2008 (SEC file no.
001-02207).**
|
10.55
|
Amended
and Restated Letter Agreement dated as of December 18, 2008 between Thomas
A. Garrett and Arby’s Restaurant Group, Inc., incorporated herein 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).**
|
10.56
|
Amended
and Restated Letter Agreement dated as of December 18, 2008 between
Sharron Barton and Wendy’s/Arby’s Group, Inc., incorporated herein 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).**
|
10.57
|
Amended
and Restated Letter Agreement dated as of December 18, 2008 between Nils
H. Okeson and Wendy’s/Arby’s Group, Inc., incorporated herein 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).**
|
10.58
|
Amended
and Restated Letter Agreement dated as of December 18, 2008 between
Stephen E. Hare and Wendy’s/Arby’s Group, Inc., incorporated herein 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).**
|
10.59
|
Amended
and Restated Letter Agreement dated as of December 18, 2008 between Roland
C. Smith and Wendy’s/Arby’s Group, Inc., incorporated herein by reference
to Exhibit 99.5 to Wendy’s/Arby’s Group’s Current Report on Form 8-K filed
on December 28, 2008 (SEC file no. 001-02207).**
|
10.60
|
Form
of Indemnification Agreement, between Wendy’s/Arby’s Group, Inc. and
certain officers, directors, and employees thereof, incorporated herein by
reference to Exhibit 10.47 to Wendy’s/Arby’s Group’s Annual Report on Form
10-K for the fiscal year ended December 28, 2008 (SEC file no.
001-02207).**
|
10.61
|
Form
of Indemnification Agreement between Arby’s Restaurant Group, Inc. and
certain directors, officers and employees thereof, incorporated herein 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).**
|
10.62
|
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).**
|
10.63
|
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
|
|
23.2
|
|
31.1
|
|
31.2
|
|
32.1
|
|
99.1
|
|
|
** 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 4, 2010
|
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 4, 2010 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)
|
|
SCHEDULE
I
Wendy’s/Arby’s
Group, Inc. (Parent Company Only)
CONDENSED
BALANCE SHEETS
(In
Thousands)
|
|
January
3, 2010
|
|
|
December
28, 2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
51,973 |
|
|
$ |
26,860 |
|
Amounts
due from subsidiaries
|
|
|
40,525 |
|
|
|
68,702 |
|
Deferred
income tax benefit and other
|
|
|
21,705 |
|
|
|
26,316 |
|
Total
current assets
|
|
|
114,203 |
|
|
|
121,878 |
|
Restricted
cash equivalents
|
|
|
890 |
|
|
|
1,056 |
|
Note
receivable, related party, net
|
|
|
25,696 |
|
|
|
25,344 |
|
Investments
in consolidated subsidiaries
|
|
|
2,379,976 |
|
|
|
2,442,799 |
|
Amounts
due from subsidiary
|
|
|
26,773 |
|
|
|
- |
|
Properties
|
|
|
11,391 |
|
|
|
15,452 |
|
Deferred
income tax benefit and other
|
|
|
23,912 |
|
|
|
89,690 |
|
Total
assets
|
|
$ |
2,582,841 |
|
|
$ |
2,696,219 |
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Intercompany
demand note payable to a subsidiary
|
|
$ |
50,000 |
|
|
$ |
50,000 |
|
Amounts
due to subsidiaries
|
|
|
158,879 |
|
|
|
194,519 |
|
Current
portion of long-term debt (a)
|
|
|
5,949 |
|
|
|
889 |
|
Other
current liabilities
|
|
|
10,429 |
|
|
|
35,629 |
|
Total
current liabilities
|
|
|
225,257 |
|
|
|
281,037 |
|
Long-term
debt (a)
|
|
|
15,052 |
|
|
|
21,001 |
|
Deferred
income taxes
|
|
|
- |
|
|
|
1,375 |
|
Other
liabilities
|
|
|
6,193 |
|
|
|
9,361 |
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $0.10 par value; 1,500,000 shares authorized; 470,424 shares
issued
|
|
|
47,042 |
|
|
|
47,042 |
|
Additional
paid-in capital
|
|
|
2,761,433 |
|
|
|
2,753,141 |
|
Accumulated
deficit
|
|
|
(380,480 |
) |
|
|
(357,541 |
) |
Common
stock held in treasury, at cost
|
|
|
(85,971 |
) |
|
|
(15,944 |
) |
Accumulated
other comprehensive loss
|
|
|
(5,685 |
) |
|
|
(43,253 |
) |
Total
stockholders' equity
|
|
|
2,336,339 |
|
|
|
2,383,445 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
2,582,841 |
|
|
$ |
2,696,219 |
|
(a)
|
Consists
of 5% convertible notes due 2023 in the amount of $2,100 as of both
January 3, 2010 and December 28, 2008 and a 6.54% equipment term loan on
one of our aircraft in the amount of $18,901 and $19,790 at January 3,
2010 and December 28, 2008,
respectively.
|
SCHEDULE
I (Continued)
Wendy’s/Arby’s
Group, Inc. (Parent Company Only)
CONDENSED
STATEMENTS OF OPERATIONS
(In
Thousands)
|
|
Year
Ended
|
|
|
|
January
3, 2010
|
|
|
December
28, 2008
|
|
|
December
30, 2007
|
|
Income:
|
|
|
|
|
|
|
|
|
|
Equity
in income (loss) from continuing operations of
subsidiaries
|
|
$ |
8,970 |
|
|
$ |
(451,158 |
) |
|
$ |
82,691 |
|
Investment
income (loss)
|
|
|
61 |
|
|
|
(21,565 |
) |
|
|
11,830 |
|
|
|
|
9,031 |
|
|
|
(472,723 |
) |
|
|
94,521 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
11,568 |
|
|
|
38,674 |
|
|
|
46,780 |
|
Depreciation
and amortization
|
|
|
1,745 |
|
|
|
2,212 |
|
|
|
2,599 |
|
Impairment
of other long-lived assets
|
|
|
- |
|
|
|
2,671 |
|
|
|
- |
|
Facilities
relocation and corporate restructuring
|
|
|
3,008 |
|
|
|
692 |
|
|
|
75,348 |
|
Intercompany
interest expense
|
|
|
420 |
|
|
|
1,392 |
|
|
|
2,671 |
|
Other
(income) expense, net
|
|
|
(1,141 |
) |
|
|
1,789 |
|
|
|
8,357 |
|
|
|
|
15,600 |
|
|
|
47,430 |
|
|
|
135,755 |
|
Loss
from continuing operations before benefit from income
taxes
|
|
|
(6,569 |
) |
|
|
(520,153 |
) |
|
|
(41,234 |
) |
Benefit
from income taxes
|
|
|
10,085 |
|
|
|
38,195 |
|
|
|
56,320 |
|
Income
(loss) from continuing operations
|
|
|
3,516 |
|
|
|
(481,958 |
) |
|
|
15,086 |
|
Equity
in income from discontinued operations of
subsidiaries
|
|
|
1,546 |
|
|
|
2,217 |
|
|
|
995 |
|
Net
income (loss)
|
|
$ |
5,062 |
|
|
$ |
(479,741 |
) |
|
$ |
16,081 |
|
SCHEDULE
I (Continued)
Wendy’s/Arby’s
Group, Inc. (Parent Company Only)
CONDENSED
STATEMENTS OF CASH FLOWS
(In
Thousands)
|
|
Year-Ended
|
|
|
|
January
3, 2010
|
|
|
December
28, 2008
|
|
|
December
30, 2007
|
|
Cash
flows from continuing operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
5,062 |
|
|
$ |
(479,741 |
) |
|
$ |
16,081 |
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
continuing operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
from subsidiaries
|
|
|
115,000 |
|
|
|
- |
|
|
|
74,474 |
|
Deferred
income tax benefit, net
|
|
|
67,241 |
|
|
|
(21,359 |
) |
|
|
(58,195 |
) |
Tax
sharing payments received from subsidiaries
|
|
|
10,417 |
|
|
|
17,000 |
|
|
|
- |
|
Tax
sharing receivable from subsidiaries, net
|
|
|
(65,366 |
) |
|
|
- |
|
|
|
- |
|
Depreciation
and amortization of properties
|
|
|
1,745 |
|
|
|
2,212 |
|
|
|
2,599 |
|
Share-based
compensation provision
|
|
|
1,555 |
|
|
|
358 |
|
|
|
2,721 |
|
Write-off
and amortization of deferred financing costs
|
|
|
25 |
|
|
|
5,132 |
|
|
|
21 |
|
Other
operating transactions with Wendy’s/Arby’s Restaurants,
LLC
|
|
|
(14,114 |
) |
|
|
- |
|
|
|
- |
|
Equity
in (income) loss from continuing operations of
subsidiaries
|
|
|
(8,970 |
) |
|
|
451,158 |
|
|
|
(82,691 |
) |
Equity
in income from discontinued operations of subsidiaries
|
|
|
(1,546 |
) |
|
|
(2,217 |
) |
|
|
(995 |
) |
Operating
investment adjustments, net (see below)
|
|
|
- |
|
|
|
22,838 |
|
|
|
(8,706 |
) |
Impairment
of other long-lived assets
|
|
|
- |
|
|
|
2,671 |
|
|
|
- |
|
Other,
net
|
|
|
(2,200 |
) |
|
|
(5,772 |
) |
|
|
(2,570 |
) |
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
current assets
|
|
|
1,467 |
|
|
|
797 |
|
|
|
(869 |
) |
Other
current liabilities
|
|
|
(5,381 |
) |
|
|
(20,355 |
) |
|
|
(3,436 |
) |
Net
cash provided by (used in) continuing operating activities
|
|
|
104,935 |
|
|
|
(27,278 |
) |
|
|
(61,566 |
) |
Cash
flows from continuing investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
repayments from subsidiaries
|
|
|
31,901 |
|
|
|
10,577 |
|
|
|
98,531 |
|
Investment
activities, net (see below)
|
|
|
- |
|
|
|
- |
|
|
|
7,220 |
|
Cost
of merger with Wendy’s
|
|
|
(608 |
) |
|
|
(18,403 |
) |
|
|
- |
|
Capital
expenditures
|
|
|
- |
|
|
|
(1,065 |
) |
|
|
(66 |
) |
Other,
net
|
|
|
165 |
|
|
|
884 |
|
|
|
(204 |
) |
Net
cash provided by (used in) continuing investing activities
|
|
|
31,458 |
|
|
|
(8,007 |
) |
|
|
105,481 |
|
Cash
flows from continuing financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances
from Wendy’s/Arby’s Restaurants, LLC
|
|
|
- |
|
|
|
155,000 |
|
|
|
- |
|
Capital
contribution to Wendy’s/Arby’s Restaurants, LLC
|
|
|
- |
|
|
|
(150,177 |
) |
|
|
- |
|
Repurchases
of common stock
|
|
|
(72,927 |
) |
|
|
- |
|
|
|
- |
|
Dividends
paid
|
|
|
(27,976 |
) |
|
|
(30,538 |
) |
|
|
(32,117 |
) |
Proceeds
from intercompany loan
|
|
|
- |
|
|
|
47,000 |
|
|
|
- |
|
Proceeds
from long-term debt
|
|
|
- |
|
|
|
20,000 |
|
|
|
- |
|
Repayments
of long-term debt
|
|
|
(889 |
) |
|
|
(2,361 |
) |
|
|
(3,226 |
) |
Other
|
|
|
(5,918 |
) |
|
|
(152 |
) |
|
|
1,370 |
|
Net
cash (used in) provided by continuing financing activities
|
|
|
(107,710 |
) |
|
|
38,772 |
|
|
|
(33,973 |
) |
Net
cash provided by continuing operations
|
|
|
28,683 |
|
|
|
3,487 |
|
|
|
9,942 |
|
Net
cash used in operating activities of discontinued
operations
|
|
|
(3,570 |
) |
|
|
(1,318 |
) |
|
|
(635 |
) |
Net
increase in cash and cash equivalents
|
|
|
25,113 |
|
|
|
2,169 |
|
|
|
9,307 |
|
Cash
and cash equivalents at beginning of year
|
|
|
26,860 |
|
|
|
24,691 |
|
|
|
15,384 |
|
Cash
and cash equivalents at end of year
|
|
$ |
51,973 |
|
|
$ |
26,860 |
|
|
$ |
24,691 |
|
SCHEDULE
I (Continued)
Wendy’s/Arby’s
Group, Inc. (Parent Company Only)
CONDENSED
STATEMENTS OF CASH FLOWS – (Continued)
(In
Thousands)
|
|
Year
Ended
|
|
|
|
January
3, 2010
|
|
|
December
28, 2008
|
|
|
December
30, 2007
|
|
Detail
of cash flows related to investments:
|
|
|
|
|
|
|
|
|
|
Operating
investment adjustments, net:
|
|
|
|
|
|
|
|
|
|
Net
recognized losses (gains), including other than temporary
losses
|
|
$ |
- |
|
|
$ |
22,838 |
|
|
$ |
(9,966 |
) |
Other
|
|
|
- |
|
|
|
- |
|
|
|
1,260 |
|
|
|
$ |
- |
|
|
$ |
23,838 |
|
|
$ |
(8,706 |
) |
Investing
investment activities, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sales and maturities of available-for-sale securities and other
investments
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
10,993 |
|
Cost
of available-for-sale securities and other investments
purchased
|
|
|
- |
|
|
|
- |
|
|
|
(3,773 |
) |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
7,220 |
|