Edgar Filing: WENDY'S/ARBY'S GROUP, INC.

form10-q_q32010.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended October 3, 2010

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

For the transition period from ______________ to _______________

Commission file number: 1-2207

WENDY’S/ARBY’S GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware		38-0471180
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


1155 Perimeter Center West, Atlanta, GA		30338
(Address of principal executive offices)		(Zip Code)

(678) 514-4100

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year,

if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X ] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X ]

There were 418,367,459 shares of the registrant’s Common Stock outstanding as of November 2, 2010.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)

	October 3,			January 3,
	2010			2010
ASSETS	(Unaudited)
Current assets:
Cash and cash equivalents	$	520,514		$	591,719
Accounts and notes receivable		88,521			88,004
Inventories		21,238			23,024
Prepaid expenses and other current assets		42,935			29,212
Deferred income tax benefit		78,764			66,557
Advertising funds restricted assets		102,758			80,476
Total current assets		854,730			878,992
Notes receivable		14,065			39,295
Investments		106,865			107,020
Properties		1,554,740			1,619,248
Goodwill		882,611			881,019
Other intangible assets		1,367,078			1,392,883
Deferred costs and other assets		74,591			56,959
Total assets	$	4,854,680		$	4,975,416

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	17,923		$	22,127
Accounts payable		88,515			103,454
Accrued expenses and other current liabilities		247,925			269,090
Advertising funds restricted liabilities		102,758			80,476
Total current liabilities		457,121			475,147
Long-term debt		1,559,634			1,500,784
Deferred income		21,815			13,195
Deferred income taxes		469,973			475,538
Other liabilities		171,550			174,413
Commitments and contingencies
Stockholders’ equity:
Common stock		47,042			47,042
Additional paid-in capital		2,768,404			2,761,433
Accumulated deficit		(393,333	)		(380,480	)
Common stock held in treasury, at cost		(249,755	)		(85,971	)
Accumulated other comprehensive income (loss)		2,229			(5,685	)
Total stockholders’ equity		2,174,587			2,336,339
Total liabilities and stockholders’ equity	$	4,854,680		$	4,975,416

See accompanying notes to condensed consolidated financial statements.

WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands Except Per Share Amounts)

	Three Months Ended						Nine Months Ended
	October 3,			September 27,			October 3,			September 27,
	2010			2009			2010			2009
	(Unaudited)
Revenues:
Sales	$	765,988		$	806,038		$	2,296,868		$	2,395,476
Franchise revenues		95,226			97,183			278,814			284,416
		861,214			903,221			2,575,682			2,679,892
Costs and expenses:
Cost of sales		667,063			684,071			1,967,569			2,046,475
General and administrative		97,948			97,909			305,942			320,533
Depreciation and amortization		46,178			47,020			137,448			143,369
Impairment of long-lived assets		27,409			15,528			41,424			31,108
Facilities relocation and corporate restructuring		-			1,725			-			8,899
Other operating expense, net		2,271			146			3,958			2,245
		840,869			846,399			2,456,341			2,552,629
Operating profit		20,345			56,822			119,341			127,263
Interest expense		(33,868	)		(36,457	)		(104,535	)		(89,671	)
Loss on early extinguishment of debt		-			-			(26,197	)		-
Investment income (expense), net		77			737			5,256			(3,850	)
Other than temporary losses on investments		-			-			-			(3,916	)
Other income, net		268			1,319			2,974			303
(Loss) income from continuing operations
before income taxes		(13,178	)		22,421			(3,161	)		30,129
Benefit from (provision for) income taxes		12,269			(8,155	)		9,594			(11,895	)
(Loss) income from continuing operations		(909	)		14,266			6,433			18,234
Income from discontinued operations, net of income taxes		-			422			-			422
Net (loss) income	$	(909	)	$	14,688		$	6,433		$	18,656

Basic and diluted income per share:	$	.00		$	.03		$	.01		$	.04

Dividends per share:	$	.015		$	.015		$	.045		$	.045

See accompanying notes to condensed consolidated financial statements.

WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

	Nine Months Ended
	October 3,			September 27,
	2010			2009
	(Unaudited)
Cash flows from continuing operating activities:
Net income	$	6,433		$	18,656
Adjustments to reconcile net income to net cash provided by continuing operating activities:
Depreciation and amortization		137,448			143,369
Impairment of long-lived assets		41,424			31,108
Accretion of long-term debt		13,013			7,516
Share-based compensation provision		10,519			11,654
Write off and amortization of deferred financing costs		10,391			13,915
Net receipt of deferred vendor incentive		10,096			13,016
Distributions received from joint venture		9,718			7,106
Non-cash rent expense		7,152			9,907
Provision for doubtful accounts		7,586			4,390
Deferred income tax benefit, net		(16,298	)		(300	)
Equity in earnings of joint venture		(7,127	)		(6,258	)
Operating investment adjustments, net (see below)		(5,201	)		2,673
Income from discontinued operations		-			(422	)
Other, net		(2,171	)		(3,892	)
Changes in operating assets and liabilities, net:
Accounts and notes receivable		(6,971	)		11
Inventories		1,824			2,770
Prepaid expenses and other current assets		(6,853	)		(7,606	)
Accounts payable		(8,973	)		(49,457	)
Accrued expenses and other current liabilities		(34,638	)		53,145
Net cash provided by continuing operating activities		167,372			251,301
Cash flows from continuing investing activities:
Capital expenditures		(94,736	)		(65,280	)
Investment activities, net (see below)		32,237			36,756
Proceeds from dispositions		4,394			9,386
Other, net		407			2,304
Net cash used in continuing investing activities		(57,698	)		(16,834	)
Cash flows from continuing financing activities:
Proceeds from long-term debt		497,661			556,006
Repayments of long-term debt		(470,942	)		(154,427	)
Repurchase of common stock		(173,537	)		(25,244	)
Dividends paid		(19,260	)		(21,088	)
Deferred financing costs		(16,286	)		(37,976	)
Other, net		591			1,685
Net cash (used in) provided by continuing financing activities		(181,773	)		318,956
Net cash (used in) provided by continuing operations before effect of
exchange rate changes on cash		(72,099	)		553,423
Effect of exchange rate changes on cash		894			1,671
Net cash (used in) provided by continuing operations		(71,205	)		555,094
Net cash used in discontinued operations		-			(538	)
Net (decrease) increase in cash and cash equivalents		(71,205	)		554,556
Cash and cash equivalents at beginning of period		591,719			90,090
Cash and cash equivalents at end of period	$	520,514		$	644,646

WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

(In Thousands)

	Nine Months Ended
	October 3,			September 27,
	2010			2009
	(Unaudited)
Detail of cash flows related to investments:
Operating investment adjustments, net:
Income on collection of DFR Notes	$	(4,909	)	$	-
Other than temporary losses on investments		-			3,916
Other, net		(292	)		(1,243	)
	$	(5,201	)	$	2,673
Investment activities, net:
Proceeds from sales of available-for-sale securities, securities sold short, and distributions from other investments	$	1,810		$	29,663
Decrease in restricted cash held for investment		-			26,681
Proceeds from repayment of DFR Notes		30,752			-
Cost of available-for-sale securities, other investments purchased, and payments to cover short positions in securities		(325	)		(19,588	)
	$	32,237		$	36,756
Supplemental cash flow information:
Cash paid during the period for:
Interest	$	108,556		$	53,110
Income taxes, net of refunds	$	11,513		$	9,999
Supplemental non-cash investing and financing activities:
Total capital expenditures	$	99,553		$	70,990
Cash capital expenditures		(94,736	)		(65,280	)
Non-cash capitalized lease and certain sales-leaseback obligations	$	4,817		$	5,710

See accompanying notes to condensed consolidated financial statements.

WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(1) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements (the “Financial Statements”) of Wendy’s/Arby’s Group, Inc. (“Wendy’s/Arby’s” or “Wendy’s/Arby’s Group” and, together with its subsidiaries, the “Company,” “we,” “us” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and, therefore, do not include all information and footnotes required by GAAP for complete financial statements. In our opinion, the Financial Statements contain all adjustments necessary to present fairly our financial position as of October 3, 2010, the results of our operations for the three months and nine months ended October 3, 2010 and September 27, 2009 and our cash flows for the nine months ended October 3, 2010 and September 27, 2009. The results of operations for the three months and nine months ended October 3, 2010 are not necessarily indicative of the results to be expected for the full 2010 fiscal year. These Financial Statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 3, 2010 (the “Form 10-K”).

We report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to December 31. Our 2009 fiscal year consisted of 53 weeks with our fiscal fourth quarter containing 14 weeks. All three month and nine month periods presented herein contain 13 weeks and 39 weeks, respectively. All references to years and quarters relate to fiscal periods rather than calendar periods.

(2) Dispositions

During the nine months ended October 3, 2010, the Company received proceeds from dispositions of $4,394 consisting of $2,332 from the sale of two Company-owned Wendy’s International, Inc. (“Wendy’s”) restaurants and 11 Company-owned Arby’s Restaurant Group, Inc. (“Arby’s” or “ARG”) restaurants to franchisees of the respective brands, $227 from the sale of surplus properties, and $1,835 related to other dispositions. These sales resulted in a net gain of $293, which is included as an offset to “Depreciation and amortization.”

During the nine months ended September 27, 2009, the Company received proceeds from dispositions of $9,386 consisting of $4,345 from the sale of 11 Company-owned Wendy’s restaurants to a franchisee of Wendy’s, $3,821 from the sale of surplus properties, and $1,220 related to other dispositions. These sales resulted in a net gain of $1,944, which is included as an offset to “Depreciation and amortization.”

(3) DFR Notes

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

During the fourth quarter of 2008, we recognized an allowance for collectability of $21,227 to reduce the then carrying amount of the DFR Notes to $24,983. As a result, we recognized income of $4,909 during the nine months ended October 3, 2010 as the repayment proceeds exceeded the carrying value of the DFR Notes. This gain is included in “Investment income (expense), net.”

WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(4) Long-Term Debt

Long-term debt consisted of the following:

	October 3,			January 3,
	2010			2010

10% Senior Notes, due in 2016	$	552,874		$	551,779
Term Loan, due in 2017		496,384			-
Senior secured term loan		-			251,488
6.20% senior notes, due in 2014		220,992			204,303
6.25% senior notes		-			193,618
Sale-leaseback obligations, due through 2029		122,624			125,176
Capitalized lease obligations, due through 2036		87,053			89,886
7% Debentures, due in 2025		80,912			80,081
6.54% Secured equipment term loan, due in 2013		12,891			18,901
5% Convertible notes		-			2,100
Other		3,827			5,579
		1,577,557			1,522,911
Less amounts payable within one year		(17,923	)		(22,127	)
	$	1,559,634		$	1,500,784

Credit Agreement

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

The Term Loan was issued at 99.5% of the principal amount, which represented an original issue discount of 0.5% and resulted in net proceeds paid to us of $497,500. The $2,500 discount is being accreted and the related charge included in interest expense through the maturity of the Term Loan. The Term Loan will mature on May 24, 2017 and requires quarterly principal installments which commenced on September 30, 2010 equal to 1% per annum of the initial principal amount outstanding, with the balance payable on the maturity date.

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

The interest rate on the Term Loan is based on (i) the Eurodollar Rate as defined in the Credit Agreement (but not less than 1.50%), plus 3.50%, or a Base Rate, as defined in the Credit Agreement (but not less than 2.50%), plus 2.50%. Since the inception of the Term Loan, we have elected to use the Eurodollar Rate which resulted in an interest rate on the Term Loan of 5.00% as of October 3, 2010.

Wendy’s/Arby’s Restaurants incurred approximately $16,353 in costs related to the Credit Agreement, which is being amortized to interest expense over the Term Loan’s term utilizing the effective interest rate method.

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

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

WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

The affirmative and negative covenants in the Credit Agreement include, among others, preservation of corporate existence; payment of taxes; and maintenance of insurance; and limitations on: indebtedness (including guarantee obligations of other indebtedness); liens; mergers, consolidations, liquidations and dissolutions; sales of assets; dividends and other payments in respect of capital stock; investments; payments of certain indebtedness; transactions with affiliates; changes in fiscal year; negative pledge clauses and clauses restricting subsidiary distributions; and material changes in lines of business. The financial covenants contained in the Credit Agreement are (i) a consolidated interest coverage ratio, (ii) a consolidated senior secured leverage ratio, and (iii) a consolidated senior secured lease adjusted leverage ratio. The covenants generally do not restrict Wendy’s/Arby’s or any of its subsidiaries that are not subsidiaries of Wendy’s/Arby’s Restaurants. Wendy’s/Arby’s Restaurants was in compliance with all covenants of the Credit Agreement as of October 3, 2010.

Convertible Notes

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

(5) Fair Value Measurement of Financial Assets and Liabilities

The carrying amounts and estimated fair values of the Company’s financial assets and liabilities were as follows:

	October 3, 2010
	Carrying		Fair
	Amount		Value
Financial assets:
Cash and cash equivalents (a)	$	520,514	$	520,514
Restricted cash equivalents (a):
Current - included in “Prepaid expenses and other current assets”		1,898		1,898
Non-current - included in “Deferred costs and other assets”		4,456		4,456
Non-current cost investments (b)		8,515		10,790
Interest rate swaps (c)		13,919		13,919

Financial liabilities:
Long-term debt, including current portion:
10% Senior Notes (d)	$	552,874	$	614,155
Term Loan (d)		496,384		501,500
6.20% senior notes (d)		220,992		247,244
Sale-leaseback obligations (e)		122,624		134,908
Capitalized lease obligations (e)		87,053		94,907
7% Debentures (d)		80,912		87,000
6.54% Secured equipment term loan (e)		12,891		13,389
Other		3,827		3,957
Total long-term debt, including current portion	$	1,577,557	$	1,697,060
Guarantees of:
Lease obligations for restaurants not operated by the Company (f)	$	343	$	343
Wendy’s franchisee loans obligations (g)	$	462	$	462

(a)	The carrying amounts approximated fair value due to the short-term maturities of the cash equivalents or restricted cash equivalents.

(b)

Fair value of these investments was based entirely on statements of account received from investment managers or investees which were principally based on quoted market or broker/dealer prices. To the extent that some of these investments, including the underlying investments in investment limited partnerships, do not have available quoted market or broker/dealer prices, the Company relied on valuations performed by the investment managers or investees in valuing those investments or third-party appraisals.

(c)	The fair values were based on information provided by the bank counterparties that is model-driven and whose inputs were observable or whose significant value drivers were observable.

(d)	The fair values were based on quoted market prices, as well as information provided by the bank counterparties that is model-driven and whose inputs were observable or whose significant value drivers were observable.

(e)	The fair values were determined by discounting the future scheduled principal payments using an interest rate assuming the same original issuance spread over a current U.S. Treasury bond yield for securities with similar durations.

WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(f)	The fair value was assumed to reasonably approximate the carrying amount. We have accrued liabilities for these lease obligations based on a weighted average risk percentage.

(g)

Wendy’s provided loan guarantees to various lenders on behalf of franchisees entering into pooled debt facility arrangements for new store development and equipment financing. Wendy’s has accrued a liability for the fair value of these guarantees, the calculation for which was based upon a weighed average risk percentage established at the inception of each program.

The carrying amounts of current accounts, notes receivable and non-current notes receivable (included in “Deferred costs and other assets”) approximated fair value due to the effect of related allowances for doubtful accounts and notes receivable. The carrying amounts of accounts payable and accrued expenses approximated fair value due to the short-term maturities of those items.

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

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

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

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

The following table presents our financial assets and liabilities (other than cash and cash equivalents) measured at fair value on a recurring basis as of October 3, 2010 by the valuation hierarchy as defined in the fair value guidance:

	October 3,		Fair Value Measurements
	2010		Level 1		Level 2		Level 3

Interest rate swaps (included in “Deferred costs and other assets”)	$	13,919	$	-	$	13,919	$	-

Derivative instruments

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.

During the third quarter of 2009, we entered into eight interest rate swaps with notional amounts totaling $361,000 to swap the fixed rate interest rates on the 6.20% and 6.25% Wendy’s senior notes for floating rates. The interest rate swaps were designated as fair value hedges of the related debt and qualify to be accounted for under the short-cut method according to the applicable guidance, resulting in no ineffectiveness in the hedging relationship.

During the first quarter of 2010, we entered into an interest rate swap with a notional amount of $39,000 on Wendy’s 6.20% senior notes. The interest rate swap was designated as a fair value hedge of the related debt and did not qualify for the short-cut method. This interest rate swap is tested for effectiveness quarterly and the hedge was determined to be effective for each quarterly period in the nine months ended October 3, 2010. If any portion of the hedge was determined to be ineffective, any changes in fair value would be recognized in our results of operations.

WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

In connection with the redemption of the Wendy’s 6.25% senior notes, as discussed above in “Note 4 – Long-term Debt,” we cancelled four interest rate swaps with notional amounts totaling $175,000. Upon cancellation, we recognized a gain of $1,875 in the second quarter of 2010, which is included in “Interest expense” for the nine months ended October, 3, 2010. The following items, including the aforementioned gain, were recognized by the Company related to its derivative activity during each of the periods presented below:

	Three Months Ended						Nine Months Ended
	October 3, 2010			September 27, 2009			October 3, 2010			September 27, 2009
Interest expense:
Interest rate swaps	$	(1,320	)	$	(1,043	)	$	(6,396	)	$	(1,043	)
Investment income:
Other		-			-			-			(286	)
	$	(1,320	)	$	(1,043	)	$	(6,396	)	$	(1,329	)

(6)	Impairment of Long-lived Assets

	Three Months Ended				Nine Months Ended
	October 3,		September 27,		October 3,		September 27,
	2010		2009		2010		2009
Wendy’s restaurant segment:
Impairment of Company-owned restaurants:
Properties	$	17,373	$	286	$	17,448	$	956
Intangible assets		3,548		-		3,955		-
		20,921		286		21,403		956
Arby’s restaurant segment:
Impairment of Company-owned restaurants:
Properties		6,333		13,923		18,694		25,719
Intangible assets		155		1,319		1,327		2,257
		6,488		15,242		20,021		27,976

Corporate - aircraft		-		-		-		2,176
Total impairment of long-lived assets	$	27,409	$	15,528	$	41,424	$	31,108

The Wendy’s and Arby’s Company-owned restaurant segment impairment losses in each period predominantly reflected impairment charges on all restaurant level assets resulting from the deterioration in operating performance of certain restaurants and additional charges for capital improvements in restaurants impaired in a prior period which did not subsequently recover. The Wendy’s impairment losses for the three months and nine months ended October 3, 2010 and September 27, 2009 also included write-downs in the carrying value of certain surplus properties and properties held for sale. Additionally, for the nine months ended October 3, 2010 the Wendy’s impairment losses included write-downs in the carrying value of options to purchase property. For the three months and nine months ended September 27, 2009, Arby’s impairment losses also included reductions in the carrying value of certain surplus properties.

During 2009, we disposed of one of our Company-owned aircraft and recorded an impairment charge based on the sale price.

All of these impairment losses represented the excess of the carrying amount over the fair value of the affected assets and are included in “Impairment of long-lived assets.” The fair values of impaired assets discussed above for the Wendy’s and Arby’s restaurant segments were generally estimated based on the present values of the associated cash flows and on the market value with respect to land (Level 3 inputs). There is no remaining carrying value of the properties and intangible assets which were measured at fair value as of October 3, 2010, July 4, 2010, and April 4, 2010.

(7) Facilities Relocation and Corporate Restructuring

The Company incurred corporate restructuring charges in 2009, primarily related to severance as a result of the merger with Wendy’s (the “Wendy’s Merger”). Such restructuring accrual, which is included in “Accrued expenses and other current liabilities,” was $660 at October 3, 2010 and $5,630 at January 3, 2010. The reduction in this accrual during the nine months ended October 3, 2010 reflects total payments of $5,006 partially offset by net adjustments of $36. We do not expect to incur any additional corporate restructuring charges with respect to the Wendy’s Merger.

WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(8)	Investment in Joint Venture with Tim Hortons Inc.

Wendy’s is a partner in a Canadian restaurant real estate joint venture (“TimWen”) with Tim Hortons Inc. Wendy’s 50% share of the joint venture is accounted for using the Equity Method. Our equity in earnings from TimWen is included in “Other operating expense, net.”

Presented below is an unaudited summary of activity related to our portion of TimWen included in our condensed consolidated balance sheets and condensed consolidated statements of operations:

	Nine Months Ended
	October 3,			September 27,
	2010			2009
Balance at beginning of period (a)	$	97,476		$	89,771

Equity in earnings for the period		9,309			8,289
Amortization of purchase price adjustments		(2,182	)		(2,031	)
		7,127			6,258

Distributions		(9,718	)		(7,106	)
Currency translation adjustment included in “Comprehensive income”		3,465			10,457
Balance at end of period (a)	$	98,350		$	99,380

(a)

Included in “Investments.”

Presented below is a summary of unaudited financial information of TimWen as of and for the nine months ended October 3, 2010 and September 27, 2009, respectively, in Canadian dollars. The summary balance sheet financial information does not distinguish between current and long-term assets and liabilities:

	October 3,		September 27,
	2010		2009
	(Canadian)		(Canadian)
Balance sheet information:
Properties	C$	80,011	C$	84,223
Cash and cash equivalents		2,315		8,465
Accounts receivable		3,941		5,026
Other		3,011		2,168
	C$	89,278	C$	99,882

Accounts payable and accrued liabilities	C$	1,418	C$	1,277
Other liabilities		8,844		10,902
Partners’ equity		79,016		87,703
	C$	89,278	C$	99,882

	Nine Months Ended
	October 3,		September 27,
	2010		2009
	(Canadian)		(Canadian)
Income statement information:
Revenues	C$	28,620	C$	28,769
Income before income taxes and net income		19,064		19,281

WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

(9) Other Than Temporary Losses on Investments

Due to market conditions and other factors present during the nine months ended September 27, 2009, we recorded other than temporary losses of $3,916 attributable primarily to the decline in fair value of three of our investments.

(10)	Income Taxes

The effective tax rate benefit for the three months ended October 3, 2010 and the effective tax rate for the three months ended September 27, 2009 was 93.1% and 36.4%, respectively. The effective rates vary from the U.S. federal statutory rate of 35% due to the effect of (1) changes in our estimated full year tax rates, (2) state income taxes, net of federal income tax benefit, (3) non-deductible expenses, (4) tax credits, (5) adjustments to our uncertain tax positions, and (6) the tax benefit of foreign tax credits, net of the tax on foreign earnings resulting from the repatriation of foreign earnings during the third quarter of 2010.

The effective tax rate benefit for the nine months ended October 3, 2010 and the effective tax rate for the nine months ended September 27, 2009 was 303.5% and 39.5%, respectively. The effective rates vary from the U.S. federal statutory rate of 35% due to the effect of (1) state income taxes, net of federal income tax benefit, (2) non-deductible expenses, (3) a reduction in our state valuation allowances in 2010, (4) tax credits, and (5) the tax benefit of foreign tax credits, net of the tax on foreign earnings resulting from the repatriation of foreign earnings during the third quarter of 2010.

For the nine months ended October 3, 2010 and September 27, 2009, our unrecognized tax benefits increased for prior periods by $3,345 and $1,438 and decreased for statute expirations by $874 and $697, respectively. Additionally, we increased interest on unrecognized tax benefits for these periods by $1,545 and $902, respectively. There were no other significant changes to unrecognized tax benefits and related interest and penalties in the nine months ended October 3, 2010 and September 27, 2009.

The Internal Revenue Service (the “IRS”) is currently conducting an examination of our 2010 and 2009 U.S. Federal income tax return years as part of the Compliance Assurance Process (“CAP”). As part of CAP, tax years are audited on a contemporaneous basis so that all or most issues are resolved prior to the filing of the tax return. The Company participated in CAP beginning with the tax period ended December 28, 2008 and Wendy’s has been a participant since its 2006 tax year. Any matters relating to our December 28, 2008 U.S. Federal income tax return and to Wendy’s U.S. Federal income tax returns for 2007 and prior years have been settled.

Wendy’s/Arby’s U.S. Federal income tax returns for periods ended December 30, 2007 through September 29, 2008 are not currently under examination by the IRS. Our foreign income tax returns are open to examination primarily for periods ending on or after January 1, 2006. Certain of these foreign income tax returns and some of our state income tax returns are currently under examination. Certain of these states have issued notices of proposed tax assessments aggregating $3,745. We dispute these notices and believe their ultimate resolution will not have a material adverse impact on our consolidated financial position or results of operations.

(11)	(Loss) Income Per Share

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

Diluted loss per share for the three months ended October 3, 2010 was the same as basic loss per share since the Company recorded a net loss and, therefore, the effect of all potentially dilutive securities on the net loss per share would have been anti-dilutive. Diluted income per share for the nine months ended October 3, 2010 and the three and nine months ended September 27, 2009 has been computed by dividing net income by the weighted average number of shares plus the potential common share effect of dilutive stock options and non-vested restricted common shares, both computed using the treasury stock method. For the nine months ended October 3, 2010 and the three months and nine months ended September 27, 2009, we excluded 23,846, 20,290 and 20,468, respectively, of potential common shares from our diluted per share calculation as they would have had anti-dilutive effects. The basic and diluted income from discontinued operations per share for the three months and nine month periods ended September 27, 2009 was less than $0.01 and, therefore, is not presented.

WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

As of October 3, 2010, our potential common shares consisted of (1) outstanding stock options which can be exercised into 28,395 shares of our Common Stock and (2) 3,100 unvested restricted shares of our Common Stock.

The weighted average number of shares used to calculate basic and diluted (loss) income per share are as follows:

	Three Months Ended				Nine Months Ended
	October 3,		September 27,		October 3,		September 27,
	2010		2009		2010		2009
Common Stock:
Basic shares - weighted average
shares outstanding		417,985		468,008		428,968		468,670
Dilutive effect of stock options
and restricted shares		-		3,385		1,006		2,423
Diluted shares		417,985		471,393		429,974		471,093

(12)	Stockholders’ Equity

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

	Nine Months Ended
	October 3,			September 27,
	2010			2009

Balance, beginning of year	$	2,336,339		$	2,383,445
Comprehensive income (a)		14,347			48,999
Dividends paid		(19,260	)		(21,088	)
Share-based compensation expense		10,519			11,654
Stock option exercises		1,227			1,935
Repurchases of common stock for treasury		(167,744	)		(25,244	)
Other		(841	)		(195	)
Balance, end of period	$	2,174,587		$	2,399,506

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

	Nine Months Ended
	October 3,			September 27,
	2010			2009

Net income	$	6,433		$	18,656
Net change in currency translation adjustment		7,878			30,415
Net unrealized losses on available-for-sale securities		(59	)		(72	)
Net unrecognized pension loss		95			-
Other comprehensive income		7,914			30,343
Comprehensive income	$	14,347		$	48,999

(13) Business Segments

We manage and internally report our operations in two segments: (1) the operation and franchising of Wendy’s restaurants and (2) the operation and franchising of Arby’s restaurants. We evaluate segment performance and allocate resources based on each segment’s operating profit (loss).

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

WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

The following is a summary of our segment information:

	Three Months Ended						Nine Months Ended
	October 3, 2010			September 27, 2009			October 3, 2010			September 27, 2009
Revenues:
Sales:
Wendy's (1)	$	525,082		$	536,802		$	1,570,240		$	1,582,928
Arby's		240,906			269,236			726,628			812,548
Total		765,988			806,038			2,296,868			2,395,476
Franchise revenues:
Wendy's		75,653			76,713			222,643			224,006
Arby's		19,573			20,470			56,171			60,410
Total		95,226			97,183			278,814			284,416
Total revenues:
Wendy's		600,735			613,515			1,792,883			1,806,934
Arby's		260,479			289,706			782,799			872,958
Total	$	861,214		$	903,221		$	2,575,682		$	2,679,892

Depreciation and amortization:
Wendy's	$	29,058		$	31,444		$	85,714		$	96,739
Arby's		13,539			14,343			40,996			42,481
Corporate		3,581			1,233			10,738			4,149
Total	$	46,178		$	47,020		$	137,448		$	143,369

Impairment of long-lived assets:
Wendy's	$	20,921		$	286		$	21,403		$	956
Arby's		6,488			15,242			20,021			27,976
Corporate		-			-			-			2,176
Total	$	27,409		$	15,528		$	41,424		$	31,108

Segment operating profit (loss):
Wendy’s	$	32,850		$	69,876		$	157,378		$	155,400
Arby’s		(7,296	)		(8,862	)		(22,258	)		(3,950	)
Corporate		(5,209	)		(4,192	)		(15,779	)		(24,187	)
Total		20,345			56,822			119,341			127,263

Unallocated items:
Interest expense		(33,868	)		(36,457	)		(104,535	)		(89,671	)
Loss on early extinguishment of debt		-			-			(26,197	)		-
Investment income (expense), net		77			737			5,256			(3,850	)
Other than temporary losses on investments		-			-			-			(3,916	)
Other income, net		268			1,319			2,974			303
(Loss) income from continuing operations before income taxes		(13,178	)		22,421			(3,161	)		30,129
Benefit from (provision for) income taxes		12,269			(8,155	)		9,594			(11,895	)
(Loss) income from continuing operations		(909	)		14,266			6,433			18,234
Income from discontinued operations, net of income taxes		-			422			-			422
Net (loss) income	$	(909	)	$	14,688		$	6,433		$	18,656

	Nine Months Ended
Cash capital expenditures:	October 3, 2010		September 27, 2009
Wendy's	$	43,904	$	30,614
Arby's		37,942		22,660
Corporate (2)		12,890		12,006
Total	$	94,736	$	65,280

_____________

(1) Sales include sales of bakery items and kids’ meal promotion items sold to franchisees.

(2) The corporate capital expenditures are primarily related to our shared services center.

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

(14) Transactions with Related Parties

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

Services Agreement

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

Sublease of New York Office Space

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

Aircraft Agreement

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

Supply Chain Relationship Agreement

In connection with the ongoing operations of the Wendy’s purchasing co-op, Quality Supply Chain Co-op, Inc. (“QSCC”), Wendy’s paid $224 and $656 primarily for payroll-related expenses to certain QSCC purchasing employees during the three months and nine months ended October 3, 2010 for which Wendy’s expects to be reimbursed by QSCC in the fourth quarter of 2010.

Strategic Sourcing Group Agreement

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

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

WENDY’S/ARBY’S GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands Except Per Share Amounts)

Revolving credit facilities

AFA Service Corporation (“AFA”), an independently controlled advertising cooperative for the Arby’s system in which we have voting interests of less than 50%, previously entered into a revolving loan agreement with ARG pursuant to which ARG provided revolving loans up to $14,500. During the third quarter of 2010, the parties agreed in principle to terms that extend the maturity to March 2012 with revolving loans up to $14,000 bearing interest at 7.5%. As of October 3, 2010, the outstanding balance under this agreement was $5,756 and there were no amounts past due.

(15) Legal and Environmental Matters

We are involved in litigation and claims incidental to our current and prior businesses. We have reserves for all of our legal and environmental matters aggregating $4,542 as of October 3, 2010. The outcome of these matters cannot be predicted with certainty and some of these matters may be disposed of unfavorably to us. Based on currently available information, including legal defenses available to us, and given the aforementioned reserves and our insurance coverage, we do not believe that the outcome of these legal and environmental matters will have a material adverse effect on our consolidated financial position or results of operations.

(16) Accounting Standards

Accounting Standards Adopted During 2010

In June 2009, the Financial Accounting Standards Board (the “FASB”) issued guidelines on the consolidation of variable interest entities which alters how a company determines when an entity that is insufficiently capitalized or not controlled through voting should be consolidated. A company has to determine whether it should provide consolidated reporting of an entity based upon the entity's purpose and design and the parent company's ability to direct the entity's actions. The guidance was effective commencing with our 2010 fiscal year. The adoption of this guidance did not have an impact on our consolidated financial statements.

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

(17) Subsequent Event

In the fourth quarter of 2009, The New Bakery Co. of Ohio, Inc. (the “Bakery”), a wholly-owned subsidiary of Wendy’s, terminated its participation in the Bakery and Confectionery Union and Industry International Pension Fund (the “Union Pension Fund”), a union-sponsored multiemployer pension plan and formally notified the plan’s trustees of its withdrawal from that plan. Subsequent to our 2010 third quarter, the terms of a new collective bargaining agreement (the “New CBA”) were agreed to by the Bakery and Bakers Local No. 57, Bakery, Confectionery, Tobacco Workers & Grain Millers International Union of America, AFL-CIO. Included in the terms of the New CBA, the Bakery agreed to participate in the Union Pension Fund as if it had not withdrawn and the unionized employees will no longer be eligible to contribute to the Company’s 401(k) plan. Accordingly, the withdrawal liability of $4,975 recorded during the fourth quarter of 2009, which remains in “Accrued expenses and other current liabilities” as of October 3, 2010, will be eliminated in the fourth quarter of 2010. The other terms of the New CBA will result in additional expense to the Company of approximately $900 in the fourth quarter of 2010, which will be included in “Cost of sales.”

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Wendy’s/Arby’s Group, Inc. (“Wendy’s/Arby’s” and, together with its subsidiaries, the “Company” or “we”) should be read in conjunction with our accompanying unaudited condensed consolidated financial statements included elsewhere herein and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended January 3, 2010 (the “Form 10-K”). There have been no significant changes as of October 3, 2010 to the application of our critical accounting policies as described in Item 7 of our Form 10-K. Certain statements we make under this Item 2 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding Forward-Looking Statements and Projections” in “Part II – Other Information” preceding “Item 1.” You should consider our forward-looking statements in light of our unaudited condensed consolidated financial statements, related notes, and other financial information appearing elsewhere in this report, our Form 10-K and our other filings with the Securities and Exchange Commission.

Introduction and Executive Overview

Our Business

Wendy’s/Arby’s is the parent company of its wholly-owned subsidiary holding company Wendy’s/Arby’s Restaurants, LLC (“Wendy’s/Arby’s Restaurants”). Wendy’s/Arby’s Restaurants is the parent company of Wendy’s International, Inc. (“Wendy’s”) and Arby’s Restaurant Group, Inc. (“Arby’s” or “ARG”), which are the owners and franchisors of the Wendy’s® and Arby’s® restaurant systems, respectively. We currently manage and internally report our operations as two business segments: the operation and franchising of Wendy’s restaurants, including its wholesale bakery operations, and the operation and franchising of Arby’s restaurants. References in this Form 10-Q to restaurants that we “own” or that are “company-owned” include owned and leased restaurants that we operate through our subsidiaries. As of October 3, 2010, the Wendy’s restaurant system was comprised of 6,554 restaurants, of which 1,391 were owned and operated by the Company. As of October 3, 2010, the Arby’s restaurant system was comprised of 3,662 restaurants, of which 1,146 were owned and operated by the Company. The 2,537 Wendy’s and Arby’s Company-owned restaurants are located principally in the United States and to a lesser extent in Canada (the “North America Restaurants”).

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

We remain committed to investing in long-term growth opportunities for our brands. Our Wendy’s initiatives to improve sales and margins include (1) our breakfast program, (2) our remodeling program, and (3) product innovation. Our Arby’s growth initiatives include (1) our value strategy, which includes our everyday affordability proposition, (2) our remodeling program, (3) a new brand positioning to be introduced in 2011, and (4) product innovation. In addition, we are aggressively pursuing international development opportunities for both brands.

As of October 3, 2010, there were approximately 500 Arby’s franchised restaurants with amounts payable to our subsidiary ARG for royalties, rent and/or other fees that were at least 60 days past due. The financial condition of a number of Arby’s franchisees was one of the factors that resulted in a net decrease of 31 and 33 in the number of franchised restaurants for fiscal 2009 and for the nine months ended October 3, 2010, respectively. During those periods 74 and 75 franchised Arby’s restaurants were closed, respectively. The trend of declining sales at franchised restaurants has resulted in decreases in royalties and other franchise revenues. In addition, Arby’s franchisee accounts receivable and related allowance for doubtful accounts have increased significantly, and may continue to grow, as a result of the deteriorating financial condition of some of our franchisees. Franchisees’ financial difficulties and the closure of franchised restaurants have also caused reductions in the contributions to and extent of advertising programs. Continuation of these trends will further affect our revenues and may have a material adverse effect on our results of operations and financial condition.

Restaurant business revenues for the first nine months of 2010 include: (1) $2,222.3 million of sales from Company-owned restaurants, (2) $74.6 million from the sale of bakery items and kids’ meal promotion items to our franchisees, (3) $259.5 million of royalty income from franchisees, and (4) $19.3 million of other franchise-related revenue and other revenues. Most of our Wendy’s and Arby’s royalty agreements provided for royalties of 4.0% of franchise revenues for the nine months ended October 3, 2010.

Key Business Measures

We track our results of operations and manage our business using the following key business measures:

Same-Store Sales

We report Arby’s North America Restaurants same-store sales commencing after a store has been open for fifteen continuous months. Wendy’s North America Restaurants same-store sales are reported after a store has been open for at least fifteen continuous months as of the beginning of the fiscal year. These methodologies are consistent with the metrics used by our management for internal reporting and analysis. Same-store sales exclude the impact of currency translation.

Restaurant Margin

We define restaurant margin as sales from Company-owned restaurants less cost of sales divided by sales from Company-owned restaurants. Cost of sales includes food and paper, restaurant labor, and occupancy, advertising and other operating costs. Sales and cost of sales exclude amounts related to bakery items and kids’ meal promotion items sold to franchisees. Restaurant margin is influenced by factors such as restaurant openings and closures, price increases, the effectiveness of our advertising and marketing initiatives, featured products, product mix, the level of our fixed and semi-variable costs, and fluctuations in food and labor costs.

DFR Notes

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

During the fourth quarter of 2008, we recognized an allowance for collectability of $21.2 million to reduce the then carrying amount of the DFR Notes to $25.0 million. As a result, we recognized income of $4.9 million during the nine months ended October 3, 2010 as the repayment proceeds exceeded the carrying value of the DFR Notes. This gain is included in “Investment income (expense), net.”

Credit Agreement

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

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

Related Party Transactions

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

Services Agreement

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

Sublease of New York Office Space

Aircraft Agreement

Supply Chain Relationship Agreement

In connection with the ongoing operations of the Wendy’s purchasing co-op, Quality Supply Chain Co-op, Inc. (“QSCC”), Wendy’s paid $0.2 million and $0.7 million primarily for payroll-related expenses to certain QSCC purchasing employees during the three months and nine months ended October 3, 2010 for which Wendy’s expects to be reimbursed by QSCC in the fourth quarter of 2010.

Strategic Sourcing Group Agreement

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

Revolving credit facilities

AFA Service Corporation (“AFA”), an independently controlled advertising cooperative for the Arby’s system in which we have voting interests of less than 50%, previously entered into a revolving loan agreement with ARG pursuant to which ARG provided revolving loans up to $14.5 million. During the third quarter of 2010, the parties agreed in principle to terms that extend the maturity to March 2012 with revolving loans up to $14.0 million bearing interest at 7.5%. As of October 3, 2010, the outstanding balance under this agreement was $5.8 million and there were no amounts past due.

Presentation of Financial Information

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

Results of Operations

Three Months Ended October 3, 2010 Compared with Three Months Ended September 27, 2009 (In Millions)

	Three Months Ended
	October 3,			September 27,			$				%
	2010			2009			Change			Change
Revenues:
Sales	$	766.0		$	806.1		$	(40.1	)		(5.0)%
Franchise revenues		95.2			97.1			(1.9	)		(2.0)
		861.2			903.2			(42.0	)		(4.7)
Costs and expenses:
Cost of sales		667.1			684.1			(17.0	)		(2.5)
General and administrative		97.9			97.9			-			-
Depreciation and amortization		46.2			47.1			(0.9	)		(1.9)
Impairment of long-lived assets		27.4			15.5			11.9			76.8
Facilities relocation and corporate restructuring		-			1.7			(1.7	)		(100.0)
Other operating expense, net		2.3			-			2.3			100.0
		840.9			846.3			(5.4	)		(0.6)
Operating profit		20.3			56.9			(36.6	)		(64.3)

Interest expense		(33.9	)		(36.5	)		2.6			(7.1)
Investment income, net		0.1			0.7			(0.6	)		(85.7)
Other income, net		0.3			1.3			(1.0	)		(76.9)
(Loss) income from continuing operations before income taxes		(13.2	)		22.4			(35.6	)		n/m
Benefit from (provision for) income taxes		12.3			(8.1	)		20.4			n/m
(Loss) income from continuing operations		(0.9	)		14.3			(15.2	)		n/m
Income from discontinued operations, net of income taxes		-			0.4			(0.4	)		(100.0)%
Net (loss) income	$	(0.9	)	$	14.7		$	(15.6	)		n/m

Restaurant statistics:
	Third Quarter 2010				Third Quarter 2009
Wendy’s same-store sales:
North America Company-owned restaurants		(3.1)%				(1.4)%
North America franchised restaurants		(1.3)%				0.4%
North America system wide		(1.7)%				(0.1)%

Arby’s same-store sales:
North America Company-owned restaurants		(9.5)%				(6.5)%
North America franchised restaurants		(4.1)%				(10.2)%
North America system wide		(5.9)%				(9.0)%

Sales:
Wendy’s	$	500.3			$	514.1
Arby’s		240.9				269.2
Bakery and kids' meal promotion items sold		24.8				22.8
Total sales	$	766.0			$	806.1

Cost of sales:
			% of Sales				% of Sales
Wendy’s
Food and paper	$	166.3		33.2%	$	162.6		31.6%
Restaurant labor		147.9		29.6%		151.8		29.5%
Occupancy, advertising and other operating costs		119.0		23.8%		115.1		22.4%
Total Wendy’s cost of sales		433.2		86.6%		429.5		83.5%

Arby’s
Food and paper		66.9		27.8%		78.8		29.3%
Restaurant labor		80.1		33.3%		84.4		31.3%
Occupancy, advertising and other operating costs		68.8		28.5%		73.4		27.3%
Total Arby’s cost of sales		215.8		89.6%		236.6		87.9%

Bakery and kids' meal promotion items sold to franchisees		18.1		n/m		18.0		n/m
Total cost of sales	$	667.1		87.1%	$	684.1		84.9%

Margin $
Wendy’s	$	67.1	$	84.6
Arby’s		25.1		32.6
Bakery and kids’ meal promotion items sold
to franchisees		6.7		4.8
Total margin	$	98.9	$	122.0

Restaurant margin %
Wendy’s		13.4%		16.5%
Arby’s		10.4%		12.1%
Total restaurant margin %		12.4%		15.0%

Franchise revenues:
Wendy’s	$	75.6	$	76.7
Arby’s		19.6		20.4
Total franchise revenues	$	95.2	$	97.1

Depreciation and amortization:
Wendy’s	$	29.1	$	31.4
Arby’s		13.5		14.3
Corporate		3.6		1.4
Total depreciation and amortization	$	46.2	$	47.1

Impairment of long-lived assets:
Wendy’s	$	20.9	$	0.3
Arby’s		6.5		15.2
Total impairment of long-lived assets	$	27.4	$	15.5

Other operating expense, net:
Wendy’s	$	1.6		$	(0.5	)
Arby’s		0.7			0.1
Corporate		-			0.4
Total other operating expense, net	$	2.3		$	-

Operating profit (loss):
Wendy’s (a)	$	32.8		$	69.9
Arby’s		(7.3	)		(8.9	)
Corporate		(5.2	)		(4.1	)
Total operating profit:	$	20.3		$	56.9

(a) Wendy’s “Operating profit (loss)” includes the margin dollars for the Bakery and kids’ meal promotion items sold to franchisees.

Restaurant count:	Company-owned			Franchised			System Wide
Wendy’s restaurant count:
Restaurant count at July 4, 2010		1,391			5,155			6,546
Opened		1			18			19
Closed		(1	)		(10	)		(11	)
Sold to franchisees		-			-			-
Restaurant count at October 3, 2010		1,391			5,163			6,554

Arby’s restaurant count:
Restaurant count at July 4, 2010		1,152			2,533			3,685
Opened		-			8			8
Closed		(6	)		(25	)		(31	)
Restaurant count at October 3, 2010		1,146			2,516			3,662

Total Wendy’s/Arby’s restaurant count at October 3, 2010		2,537			7,679			10,216

Sales
	Change
	(In Millions)

Wendy’s	$	(13.8	)
Arby’s		(28.3	)
Bakery and kids’ meal promotion items sold to franchisees		2.0
	$	(40.1	)

The decrease in sales was primarily due to the decline in Wendy’s and Arby’s North America Company-owned same-store sales of 3.1% and 9.5%, respectively. Wendy’s and Arby’s North America Company-owned same-store sales were impacted by the generally negative economic trends and competitive pressures described above and in our Form 10-K.

Wendy’s North America Company-owned same-store sales decreased 3.1%, of which 1.7% was due to a decrease in the number of U.S. customer transactions in the 2010 third quarter as compared to the 2009 third quarter despite the effect of a successful new product launch during the 2010 third quarter. Wendy’s Canada Company-owned same-store sales decreased $3.1 million primarily due to an increase in value added sales tax in certain Canadian provinces in the third quarter of 2010. The negative factors impacting Wendy’s sales were partially offset by (1) the effect of an approximate 1% blended price increase taken primarily in late 2009 and (2) a $3.8 million positive impact from favorable foreign currency translation. Wendy’s locations sold or closed during or subsequent to the 2009 third quarter generated $3.5 million of sales in that 2009 period that did not recur in 2010, which was partially offset by sales of $2.3 million in the third quarter of 2010 from new stores opened subsequent to the third quarter of 2009.

Arby’s North America Company-owned same-store sales were impacted by (1) a decrease of approximately 2.8% in same-store sales due to certain in-store promotional discounts offered during the 2009 third quarter, which did not recur during the 2010 third quarter, (2) a decrease of 7.0% in our average per customer check amount primarily as a result of the expansion in 2010 of Arby’s everyday value strategy, and (3) a decrease in advertising expenditures in the 2010 third quarter as compared to the 2009 third quarter. Arby’s locations sold or closed during or subsequent to the 2009 third quarter generated $2.3 million of sales in that 2009 period that did not recur in 2010, which was mostly offset by sales of $2.1 million in the third quarter of 2010 from stores acquired from a franchisee subsequent to the third quarter of 2009.

Franchise Revenues
	Change
	(In Millions)

Wendy’s	$	(1.1	)
Arby’s		(0.8	)
	$	(1.9	)

The decrease in franchise revenues was primarily due to the decline in Wendy’s and Arby’s North America franchised restaurant same-store sales of 1.3% and 4.1%, respectively.

Wendy’s North America franchised restaurant same-store sales were impacted by the same factors described above for Wendy’s Company-owned restaurants, although we believe certain franchised restaurants mitigated some of the decline in same-store sales through greater price increases than those taken by Wendy’s Company-owned restaurants.

Arby’s North America franchised restaurant same-store sales were impacted by the same factors described above for Arby’s Company-owned restaurants, although Arby’s North America franchised restaurants in 2010 (1) were comparing to weaker 2009 sales levels than at Company-owned restaurants as a result of fewer in-store promotional discounts offered by franchisees during the 2009 third quarter, (2) participated in a higher level of local advertising than Company-owned restaurants, and (3) had a higher check average as a result of pricing and menu mix as compared to Company-owned restaurants.

Cost of Sales
	Change

Wendy’s	3.1 % points
Arby’s	1.7 % points
Consolidated	2.2 % points

Wendy’s North America Company-owned restaurant cost of sales increased as a percent of sales in the 2010 third quarter as compared to the 2009 third quarter, primarily attributable to increases in food and paper costs and in occupancy, advertising, and other operating expenses. Wendy’s food and paper costs were impacted by a 1.6% point increase due to higher commodity prices and product quality improvements. The increase in food and paper costs as a percentage of sales was partially offset by the approximate 1% blended price increase taken primarily in late 2009. As a percentage of sales, Wendy’s restaurant labor costs for the 2010 quarter were relatively flat as compared to the 2009 quarter due to the offsetting effects of (1) a 0.6% point increase due to the deleverage effect of the decline in Wendy’s same-store sales without similar reductions in fixed and semi-variable costs and (2) a 0.5% point decrease in incentive compensation expense. The increase in occupancy, advertising, and other operating expenses for the Wendy’s brand was primarily due to a 1.1% increase in advertising expenses associated with the launch of the brand’s breakfast daypart in certain test markets.

As a percentage of sales, Arby’s North America Company-owned restaurant cost of sales increased in the 2010 quarter as compared to the 2009 quarter due to higher restaurant labor costs and higher occupancy, advertising, and other expenses, partially offset by a decrease in food and paper costs. Restaurant labor costs and occupancy, advertising, and other operating expenses were mainly impacted by increases of 1.7% points and 1.5% points, respectively, due to the deleverage effect of the decline in Arby’s same-store sales without similar reductions in fixed and semi-variable costs excluding advertising. The increase in Arby’s occupancy, advertising, and other operating costs was offset in part by a 0.5% point decrease in advertising expenditures. The decrease in food and paper costs was comprised principally of a 2.6% point decrease related to certain in-store promotional discounts offered during the 2009 third quarter, which did not recur during the 2010 third quarter, partially offset by a 1.1% point increase in commodity costs.

General and Administrative
	Change
	(In Millions)

Provision for doubtful accounts	$	2.2
Franchise incentives		1.5
Integration costs		(2.5	)
Legal expenses		(2.3	)
Other, net		1.1
	$	0.0

General and administrative expenses were unchanged compared to the same period in the prior year. This was primarily related to (1) an increase in the provision for doubtful accounts primarily associated with the collectability of certain franchisee receivables and (2) an increase in franchise incentives for the Wendy’s remodeling program, which were offset primarily by (1) decreases in Wendy’s–related integration costs resulting from the completion of integration efforts in early 2010 and (2) a $2.5 million reduction in legal reserves for certain previously accrued legal matters.

Depreciation and Amortization
	Change
	(In Millions)

Wendy’s restaurants, primarily properties	$	(2.3	)
Arby’s restaurants, primarily properties		(0.8	)
General corporate		2.2
	$	(0.9	)

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

Impairment of Long-Lived Assets
		Change