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Wendy's International 10-Q 2011
TWC_WR 10Q Q3 2011
 
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 2, 2011

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
THE WENDY’S COMPANY
(Exact name of registrants as specified in its charter)

Delaware
 
38-0471180
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
One Dave Thomas Blvd., Dublin, Ohio
 
43017
(Address of principal executive offices)
 
(Zip Code)

(614) 764-3100
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)

Commission file number: 333-161613
WENDY’S RESTAURANTS, LLC
(Exact name of registrants as specified in its charter)

Delaware
 
38-0471180
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
One Dave Thomas Blvd., Dublin, Ohio
 
43017
(Address of principal executive offices)
 
(Zip Code)

(614) 764-3100
(Registrant’s telephone number, including area code)
1155 Perimeter Center West, Atlanta, GA 30338
 (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.
The Wendy’s Company
Yes [x] No [ ]
Wendy’s Restaurants, LLC
Yes [ ] No [x]*

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
The Wendy’s Company
Yes [x] No [ ]
Wendy’s Restaurants, LLC
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.
The Wendy’s Company
Large accelerated filer   [x]      Accelerated filer [ ]       Non-accelerated filer [ ]      Smaller reporting company [ ]

Wendy’s Restaurants, LLC
Large accelerated filer   [ ]      Accelerated filer [ ]       Non-accelerated filer [x]      Smaller reporting company [ ]

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

There were 389,140,409 shares of The Wendy’s Company common stock outstanding as of November 3, 2011.

Wendy’s Restaurants, LLC meets the conditions set forth in General Instruction (H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with reduced disclosure format.

* Wendy’s Restaurants, LLC has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the period it was required to file such reports.

 

Explanatory Note

This Quarterly Report on Form 10-Q is a combined report being filed separately by The Wendy’s Company (“The Wendy’s Company”) and Wendy’s Restaurants, LLC (“Wendy’s Restaurants”), a direct 100% owned subsidiary holding company of The Wendy’s Company. Unless the context indicates otherwise, any reference in this report to the “Companies,” “we,” “us,” and “our” refers to The Wendy’s Company together with its direct and indirect subsidiaries, including Wendy’s Restaurants. Each registrant hereto is filing on its own behalf all of the information contained in this quarterly report that relates to such registrant. Each registrant hereto is not filing any information that does not relate to such registrant, and therefore makes no representation as to any such information. Until July 5, 2011, The Wendy’s Company was known as Wendy’s/Arby’s Group, Inc. and Wendy’s Restaurants was known as Wendy’s/Arby’s Restaurants, LLC.

Where information or an explanation is provided that is substantially the same for each company, such information or explanation has been combined in this Quarterly Report on Form 10-Q. Where information or an explanation is not substantially the same for each company, we have provided separate information and explanation. In addition, separate financial statements for each company are included in Part I Item 1, “Financial Statements.”

The principal subsidiaries of Wendy’s Restaurants for the periods covered in this Quarterly Report on Form 10-Q are Wendy’s International, Inc. (“Wendy’s”) and its subsidiaries. On July 4, 2011, Wendy’s Restaurants sold 100% of the common stock of Arby’s Restaurant Group, Inc. (“Arby’s”) for cash and an indirect 18.5% interest in Arby’s (see Note 2 - Discontinued Operations for additional information regarding the sale of Arby’s). As a result, substantially all of the continuing operating results of The Wendy’s Company are derived from the operating results of Wendy’s and its subsidiaries.


3


THE WENDY’S COMPANY AND SUBSIDIARIES
WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES
INDEX TO FORM 10-Q



 
Page
 
The Wendy’s Company and Subsidiaries
 
Wendy’s Restaurants, LLC and Subsidiaries
 
The Wendy’s Company and Subsidiaries and Wendy’s Restaurants, LLC and Subsidiaries
 
 
 


4


PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.

THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)

 
October 2,
2011
 
January 2,
2011
ASSETS
(Unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
488,817

 
$
512,508

Accounts and notes receivable
71,712

 
84,258

Inventories
12,508

 
22,694

Prepaid expenses and other current assets
32,274

 
24,386

Deferred income tax benefit
58,279

 
34,389

Advertising funds restricted assets
72,116

 
76,553

Total current assets
735,706

 
754,788

Properties
1,152,666

 
1,551,261

Goodwill
867,701

 
883,644

Other intangible assets
1,309,204

 
1,358,574

Investments
119,207

 
107,223

Deferred costs and other assets
68,811

 
77,164

Total assets
$
4,253,295

 
$
4,732,654

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
8,088

 
$
18,415

Accounts payable
69,599

 
81,361

Accrued expenses and other current liabilities
192,722

 
245,157

Advertising funds restricted liabilities
72,116

 
76,553

Total current liabilities
342,525

 
421,486

Long-term debt
1,348,707

 
1,553,987

Deferred income
13,137

 
11,460

Deferred income taxes
441,896

 
412,293

Other liabilities
109,677

 
170,254

Commitments and contingencies


 


Stockholders’ equity:
 

 
 

Common stock
47,042

 
47,042

Additional paid-in capital
2,781,497

 
2,771,126

Accumulated deficit
(431,197
)
 
(412,464
)
Common stock held in treasury, at cost
(394,257
)
 
(249,547
)
Accumulated other comprehensive (loss) income
(5,732
)
 
7,017

Total stockholders’ equity
1,997,353

 
2,163,174

Total liabilities and stockholders’ equity
$
4,253,295

 
$
4,732,654


See accompanying notes to condensed consolidated financial statements.


5


THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Amounts)

 
Three Months Ended
 
Nine Months Ended
 
October 2, 2011
 
October 3, 2010
 
October 2, 2011
 
October 3, 2010
 
(Unaudited)
Revenues:
 
 
 
 
 
 
 
Sales
$
534,525

 
$
525,082

 
$
1,588,048

 
$
1,570,240

Franchise revenues
76,891

 
75,626

 
228,292

 
222,616

 
611,416

 
600,708

 
1,816,340

 
1,792,856

Costs and expenses:
 

 
 

 
 
 
 
Cost of sales
458,000

 
451,319

 
1,361,669

 
1,324,970

General and administrative
66,006

 
73,984

 
215,147

 
230,405

Transaction related costs
23,839

 

 
30,762

 

Depreciation and amortization
30,816

 
32,639

 
90,972

 
96,452

Impairment of long-lived assets

 
20,921

 
8,262

 
21,403

Other operating expense, net
365

 
1,555

 
1,687

 
2,728

 
579,026

 
580,418

 
1,708,499

 
1,675,958

Operating profit
32,390

 
20,290

 
107,841

 
116,898

Interest expense
(28,384
)
 
(29,159
)
 
(85,915
)
 
(89,740
)
Loss on early extinguishment of debt

 

 

 
(26,197
)
Investment income, net
3

 
77

 
188

 
5,254

Other income, net
301

 
163

 
706

 
2,116

Income (loss) from continuing operations before
     income taxes
4,310

 
(8,629
)
 
22,820

 
8,331

(Provision for) benefit from income taxes
(1,766
)
 
7,872

 
(9,198
)
 
3,665

Income (loss) from continuing operations
2,544

 
(757
)
 
13,622

 
11,996

Discontinued operations:
 
 
 
 
 
 
 
(Loss) income from discontinued operations, net
     of income taxes
(1,441
)
 
(152
)
 
1,118

 
(5,563
)
Loss on disposal of discontinued operations, net
     of income taxes
(5,069
)
 

 
(8,849
)
 

Net loss from discontinued operations
(6,510
)
 
(152
)
 
(7,731
)
 
(5,563
)
Net (loss) income
$
(3,966
)
 
$
(909
)
 
$
5,891

 
$
6,433

 
 
 
 
 
 
 
 
Basic and diluted income (loss) per share:
 
 
 
 
 
 
 
Continuing operations
$
.01

 
$
0.00

 
$
.03

 
$
.03

Discontinued operations
(.02
)
 
0.00

 
(.02
)
 
(.02
)
Net (loss) income
$
(.01
)
 
$
0.00

 
$
.01

 
$
.01

 
 
 
 
 
 
 
 
Dividends per share:
$
.02

 
$
.015

 
$
.06

 
$
.045


See accompanying notes to condensed consolidated financial statements.

6


THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)


 
Nine Months Ended
 
October 2, 2011
 
October 3, 2010
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
5,891

 
$
6,433

Adjustments to reconcile net income to net cash provided by operating
   activities:
 

 
 

Depreciation and amortization
113,085

 
137,448

Net receipt of deferred vendor incentives
13,876

 
10,096

Share-based compensation provision
13,756

 
10,519

Distributions received from joint venture
10,784

 
9,718

Impairment of long-lived assets
9,820

 
41,424

Loss on disposal of Arby’s
8,849

 

Non-cash rent expense
6,169

 
7,152

Accretion of long-term debt
6,137

 
13,013

Write-off and amortization of deferred financing costs
4,863

 
10,391

Deferred income tax provision (benefit), net
4,871

 
(16,298
)
Provision for doubtful accounts
2,004

 
7,586

Operating investment adjustments, net (see below)
(145
)
 
(5,201
)
Equity in earnings in joint ventures, net
(7,817
)
 
(7,127
)
Other, net
128

 
(2,171
)
Changes in operating assets and liabilities:
 
 
 
Accounts and notes receivable
(6,550
)
 
(6,971
)
Inventories
(210
)
 
1,824

Prepaid expenses and other current assets
(8,138
)
 
(6,853
)
Accounts payable
9,365

 
(8,973
)
Accrued expenses and other current liabilities
(4,635
)
 
(34,533
)
Net cash provided by operating activities
182,103

 
167,477

Cash flows from investing activities:
 

 
 

Proceeds from sale of Arby’s, net
103,162

 

Proceeds from other dispositions
3,799

 
4,394

Capital expenditures
(91,913
)
 
(94,736
)
Restaurant acquisitions
(6,613
)
 

Franchise incentive loans
(1,269
)
 

Investment activities, net (see below)
(818
)
 
32,237

Other, net
(245
)
 
407

Net cash provided by (used in) investing activities
6,103

 
(57,698
)
Cash flows from financing activities:
 

 
 

Proceeds from long-term debt

 
497,661

Repayments of long-term debt
(36,611
)
 
(470,942
)
Proceeds from stock option exercises
5,345

 
1,380

Repurchases of common stock
(152,681
)
 
(173,537
)
Dividends paid
(24,584
)
 
(19,260
)
Deferred financing costs
(57
)
 
(16,286
)
Other, net
(753
)
 
(894
)
Net cash used in financing activities
(209,341
)
 
(181,878
)
Net cash used in operations before effect of exchange rate
    changes on cash
(21,135
)
 
(72,099
)
Effect of exchange rate changes on cash
(2,556
)
 
894

Net decrease in cash and cash equivalents
(23,691
)
 
(71,205
)
Cash and cash equivalents at beginning of period
512,508

 
591,719

Cash and cash equivalents at end of period
$
488,817

 
$
520,514


7


THE WENDY’S COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In Thousands)


 
Nine Months Ended
 
October 2, 2011
 
October 3, 2010
 
(Unaudited)
Detail of cash flows related to investments:
 
 
 
Operating investment adjustments, net:
 
 
 
Income on collection of DFR Notes
$

 
$
(4,909
)
Other net recognized gains
(145
)
 
(292
)
 
$
(145
)
 
$
(5,201
)
Investment activities, net:
 
 
 
Proceeds from sales of investments
$
365

 
$
1,810

Proceeds from repayment of DFR Notes

 
30,752

Cost of securities

 
(325
)
Investment in joint venture
(1,183
)
 

 
$
(818
)
 
$
32,237

Supplemental cash flow information:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
96,760

 
$
108,556

Income taxes, net of refunds
$
11,523

 
$
11,513

 
 
 
 
Supplemental non-cash investing and financing activities:
 

 
 
Total capital expenditures
$
92,707

 
$
99,553

Cash capital expenditures
(91,913
)
 
(94,736
)
Non-cash capitalized lease and certain sales-leaseback obligations
$
794

 
$
4,817

 
 
 
 
Indirect investment in Arby's
$
19,000

 
$

 
 
 
 


See accompanying notes to condensed consolidated financial statements.


8



WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)

 
October 2,
2011
 
January 2,
2011
ASSETS
(Unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
345,517

 
$
198,686

Accounts and notes receivable
70,808

 
83,352

Inventories
12,508

 
22,694

Prepaid expenses and other current assets
23,385

 
24,032

Deferred income tax benefit
59,758

 
45,067

Advertising funds restricted assets
72,116

 
76,553

Total current assets
584,092

 
450,384

Properties
1,152,617

 
1,541,853

Goodwill
872,978

 
888,921

Other intangible assets
1,309,204

 
1,358,574

Investments
114,609

 
102,406

Deferred costs and other assets
67,879

 
74,559

Total assets
$
4,101,379

 
$
4,416,697

 
 
 
 
LIABILITIES AND INVESTED EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
6,651

 
$
17,047

Accounts payable
69,157

 
81,148

Accrued expenses and other current liabilities
193,510

 
244,300

Advertising funds restricted liabilities
72,116

 
76,553

Total current liabilities
341,434

 
419,048

Long-term debt
1,338,490

 
1,542,684

Due to parent
19,401

 
30,808

Deferred income
13,137

 
11,460

Deferred income taxes
502,598

 
478,472

Other liabilities
96,806

 
157,595

Commitments and contingencies


 


Invested equity:
 
 
 
Member interest, $0.01 par value; 1,000 shares authorized,
one share issued and outstanding

 

Other capital
2,436,432

 
2,423,459

Accumulated deficit
(487,186
)
 
(499,500
)
Advances to parent
(155,000
)
 
(155,000
)
Accumulated other comprehensive (loss) income
(4,733
)
 
7,671

Total invested equity
1,789,513

 
1,776,630

Total liabilities and invested equity
$
4,101,379

 
$
4,416,697


 
See accompanying notes to condensed consolidated financial statements.

9


WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
 
 
 
Three Months Ended
 
Nine Months Ended
 
October 2, 2011
 
October 3, 2010
 
October 2, 2011
 
October 3, 2010
 
 (Unaudited)
Revenues:
 
 
 
 
 
 
 
Sales
$
534,525

 
$
525,082

 
$
1,588,048

 
$
1,570,240

Franchise revenues
76,891

 
75,626

 
228,292

 
222,616

 
611,416

 
600,708

 
1,816,340

 
1,792,856

Costs and expenses:
 

 
 

 
 
 
 
Cost of sales
458,000

 
451,319

 
1,361,669

 
1,324,970

General and administrative
62,732

 
72,360

 
207,373

 
225,206

Transaction related costs
23,571

 

 
29,542

 

Depreciation and amortization
30,758

 
32,174

 
90,390

 
95,055

Impairment of long-lived assets

 
20,921

 
8,262

 
21,403

Other operating expense, net
362

 
1,553

 
1,582

 
2,887

 
575,423

 
578,327

 
1,698,818

 
1,669,521

Operating profit
35,993

 
22,381

 
117,522

 
123,335

Interest expense
(28,171
)
 
(28,855
)
 
(85,254
)
 
(88,752
)
Loss on early extinguishment of debt

 

 

 
(26,197
)
Other income, net
301

 
234

 
703

 
999

Income (loss) from continuing operations before
     income taxes
8,123

 
(6,240
)
 
32,971

 
9,385

(Provision for) benefit from income taxes
(3,213
)
 
6,749

 
(12,926
)
 
3,350

Income from continuing operations
4,910

 
509

 
20,045

 
12,735

Discontinued operations:
 
 
 
 
 
 
 
(Loss) income from discontinued operations, net
     of income taxes
(1,441
)
 
(152
)
 
1,118

 
(5,563
)
Loss on disposal of discontinued operations, net
     of income taxes
(5,069
)
 

 
(8,849
)
 

Net loss from discontinued operations
(6,510
)
 
(152
)
 
(7,731
)
 
(5,563
)
Net (loss) income
$
(1,600
)
 
$
357

 
$
12,314

 
$
7,172


 
See accompanying notes to condensed consolidated financial statements.



10


WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

 
Nine Months Ended
 
October 2,
2011
 
October 3,
2010
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
12,314

 
$
7,172

Adjustments to reconcile net income to net cash provided by operating
activities:

 

Depreciation and amortization
112,503

 
136,051

Net receipt of deferred vendor incentives
13,876

 
10,096

Share-based compensation provision
12,973

 
9,841

Distributions received from joint venture
10,784

 
9,718

Impairment of long-lived assets
9,820

 
41,424

Loss on disposal of Arby’s
8,849

 

Deferred income tax provision (benefit), net
8,600

 
(4,918
)
Non-cash rent expense
6,166

 
7,152

Accretion of long-term debt
6,137

 
13,013

Write-off and amortization of deferred financing costs
4,854

 
10,378

Tax sharing payable to parent, net
2,437

 
(8,673
)
Provision for doubtful accounts
2,004

 
7,586

Other operating transactions with parent
(4,366
)
 
(6,831
)
Equity in earnings in joint ventures, net
(7,817
)
 
(7,127
)
Tax sharing payment to parent
(13,078
)
 

Other, net
191

 
(1,731
)
Changes in operating assets and liabilities:

 

Accounts and notes receivable
(6,664
)
 
(6,721
)
Inventories
(210
)
 
1,824

Prepaid expenses and other current assets
(8,520
)
 
(7,386
)
Accounts payable
8,960

 
(7,289
)
Accrued expenses and other current liabilities
(513
)
 
(32,616
)
Net cash provided by operating activities
179,300

 
170,963

Cash flows from investing activities:
 
 
 
Proceeds from sale of Arby’s, net
103,162

 

Proceeds from other dispositions
3,799

 
4,394

Capital expenditures
(91,913
)
 
(94,736
)
Restaurant acquisitions
(6,613
)
 

Franchise incentive loans
(1,269
)
 

Investment in joint venture
(1,183
)
 

Other, net
(245
)
 
1,369

Net cash provided by (used in) investing activities
5,738

 
(88,973
)
Cash flows from financing activities:
 
 
 
Proceeds from long-term debt

 
497,661

Repayments of long-term debt
(35,594
)
 
(462,831
)
Dividends paid to parent

 
(443,700
)
Deferred financing costs
(57
)
 
(16,286
)
Net cash used in financing activities
(35,651
)
 
(425,156
)
Net cash provided by (used in) operations before effect of exchange rate
changes on cash
149,387

 
(343,166
)
Effect of exchange rate changes on cash
(2,556
)
 
894

Net increase (decrease) in cash and cash equivalents
146,831

 
(342,272
)
Cash and cash equivalents at beginning of period
198,686

 
538,864

Cash and cash equivalents at end of period
$
345,517

 
$
196,592


11


WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In Thousands)

 
Nine Months Ended
 
October 2,
2011
 
October 3,
2010
 
(Unaudited)
Supplemental cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
96,097

 
$
107,326

Income taxes, net of refunds
$
9,531

 
$
7,458

 
 
 
 
Supplemental non-cash investing and financing activities:
 

 
 

Total capital expenditures
$
92,707

 
$
99,553

Cash capital expenditures
(91,913
)
 
(94,736
)
Non-cash capitalized lease and certain sales-leaseback obligations
$
794

 
$
4,817

 
 
 
 
Indirect investment in Arby's
$
19,000

 
$


 
See accompanying notes to condensed consolidated financial statements.




12

THE WENDY’S COMPANY AND SUBSIDIARIES
WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED 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 The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company”) and Wendy’s Restaurants, LLC (“Wendy’s Restaurants”) 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 2, 2011 and the results of our operations for the three months and nine months ended October 2, 2011 and October 3, 2010 and our cash flows for the nine months ended October 2, 2011 and October 3, 2010. The results of operations for the three months and nine months ended October 2, 2011 are not necessarily indicative of the results to be expected for the full 2011 fiscal year. These Financial Statements should be read in conjunction with the audited consolidated financial statements for The Wendy’s Company and Wendy’s Restaurants, and combined notes thereto, included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2011 (the “Form 10-K”).

On July 5, 2011, and as a result of the sale of Arby’s Restaurant Group, Inc. (“Arby’s”) discussed in Note 2, Wendy’s/Arby’s Group, Inc. changed its name to The Wendy’s Company and Wendy’s/Arby’s Restaurants, LLC, a 100% owned subsidiary of The Wendy’s Company, changed its name to Wendy’s Restaurants.

The Wendy’s Company and Wendy’s Restaurants (together, the “Companies”) manage and internally report their business in one segment: the operation and franchising of Wendy’s® restaurants through a wholly owned subsidiary Wendy’s International, Inc. (“Wendy’s”), including its wholesale bakery operations. References herein to The Wendy’s Company corporate (“Corporate”) represent The Wendy’s Company parent company only functions and their effect on the Company’s consolidated results of operations and financial condition.

We report on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to December 31. 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) Discontinued Operations
 
On July 4, 2011, Wendy’s Restaurants completed the sale of 100% of the common stock of Arby’s, its wholly owned subsidiary, to ARG IH Corporation (“Buyer”), a wholly owned subsidiary of ARG Holding Corporation (“Buyer Parent”), for $130,000 in cash (subject to customary purchase price adjustments) and 18.5% of the common stock of Buyer Parent (through which Wendy’s Restaurants indirectly retained an 18.5% interest in Arby’s) with a fair value of $19,000. Buyer and Buyer Parent were formed for purposes of this transaction. The Buyer also assumed approximately $190,000 of Arby’s debt, consisting primarily of capital lease and sale-leaseback obligations. The sale occurred pursuant to the terms of a Purchase and Sale Agreement by and among Wendy’s Restaurants, Buyer Parent and Buyer dated as of June 13, 2011. In accordance with the Purchase and Sale Agreement, The Wendy’s Company made an election under §338(h)(10) of the Internal Revenue Code, which has the effect of treating the transaction as a sale of assets and results in an approximate $240,000 ordinary loss for income tax purposes. Had this election not been made, the sale of Arby’s common stock would have resulted in a capital loss for income tax purposes.
Wendy’s Restaurants also entered into a Stockholders Agreement with Buyer Parent and ARG Investment Corporation, an entity affiliated with Buyer Parent, which sets forth certain agreements among the parties thereto concerning, among other things, the governance of Buyer Parent and transfer rights, information rights and registration rights with respect to the equity securities of Buyer Parent. In addition, Wendy’s Restaurants entered into a Transition Services Agreement with Buyer, pursuant to which it is providing and being reimbursed for continuing corporate and shared services to Buyer for a limited period of time; such services are currently anticipated to be completed by the end of 2011.
Information related to Arby’s has been reflected in the accompanying condensed consolidated financial statements as follows:
Balance sheets - As a result of our sale of Arby’s on July 4, 2011, there are no remaining Arby’s assets and liabilities as of October 2, 2011. Arby’s assets and liabilities were included in our condensed consolidated balance sheet as of January 2, 2011; however, they were not reclassified to discontinued operations.

13

THE WENDY’S COMPANY AND SUBSIDIARIES
WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

Statements of operations - Arby’s (loss) income from operations for the period from January 3, 2011 through July 3, 2011 and the three months and nine months ended October 3, 2010 has been classified as discontinued operations. Loss from discontinued operations for the three months and nine months ended October 2, 2011 also includes additional Arby’s expenses which were incurred as a result of the sale and the loss on Arby’s disposal, as further described below.
Statements of cash flows - Arby’s cash flows prior to its sale (for the period from January 3, 2011 through July 3, 2011 and for the nine months ended October 3, 2010) have been included in, and not separately reported from, all our cash flows. The statement of cash flows for the nine months ended October 2, 2011 also includes the effects of the sale of Arby’s in the third quarter of 2011.
Our condensed consolidated statements of operations for periods through July 3, 2011 (prior to the Arby’s sale) include certain indirect corporate overhead costs in “General and administrative,” which for segment reporting purposes had previously been allocated to Arby’s. These indirect corporate overhead costs do not qualify for classification within discontinued operations, and therefore are included in “General and administrative” in continuing operations. Interest expense on Arby’s debt that was assumed by Buyer has been included in discontinued operations; interest expense on Wendy’s Restaurants’ credit agreement, which was not required to be repaid as a result of the sale, continues to be included in “Interest expense” in continuing operations.

The following table details Arby’s revenues and (loss) income from operations which have been reported in discontinued operations:

 
 
Three Months Ended
 
Nine Months Ended
 
 
October 2,
2011
 
October 3,
2010
 
October 2,
2011
 
October 3,
2010
Revenues
 
$

 
$
260,506

 
$
546,453

 
$
782,826

 
 
 
 
 
 
 
 
 
Loss from discontinued operations, net of
     income taxes:
 
 
 
 
 
 
 
 
(Loss) income from discontinued operations before
     income taxes
 
$
(2,287
)
 
$
(4,549
)
 
$
1,992

 
$
(11,492
)
Benefit from (provision for) income taxes
 
846

 
4,397

 
(874
)
 
5,929

 
 
(1,441
)
 
(152
)
 
1,118

 
(5,563
)
Loss on disposal, net of income taxes
 
(5,069
)
 

 
(8,849
)
 

Loss from discontinued operations
 
$
(6,510
)
 
$
(152
)
 
$
(7,731
)
 
$
(5,563
)

Included in loss from discontinued operations for the three months ended October 2, 2011 are (1) $2,112 for certain sales and use tax liabilities pursuant to the indemnification provisions of the Purchase and Sale Agreement, (2) incentive compensation of $704 as a result of the completion of the Arby’s sale, and (3) the reversal of previously recognized compensation costs of $529 due to the modification of the terms of stock awards which had been issued to Arby’s employees.

The Companies recorded a pre-tax loss on disposal of Arby’s of $5,277 during the nine months ended October 2, 2011 which included the effect of the valuation of our indirect retained interest ($19,000), transaction closing costs ($11,500), and post closing purchase price adjustments primarily related to working capital ($14,800). During the three months ended October 2, 2011, the Companies recorded favorable adjustments of $723 which reduced the estimated loss on disposal recorded in the second quarter of 2011. The Companies recognized income tax expense associated with the loss on disposal of $3,572 during the nine months ended October 2, 2011. This income tax expense was comprised of (1) an income tax benefit (expense) of $2,220 and $(268) recorded in the second and third quarter of 2011, respectively, on the pre-tax loss on disposal and (2) income tax expense of $5,524 recorded in the third quarter of 2011 upon completion of the Arby’s sale due to a permanent difference between the book and tax basis of Arby’s goodwill.


14

THE WENDY’S COMPANY AND SUBSIDIARIES
WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

The following table sets forth the effect of the sale of Arby’s on certain information of Wendy’s Restaurants as of January 2, 2011 as disclosed in the combined notes to our consolidated financial statements included in the Form 10-K:
 
 
Applicable to
 
 
Discontinued Operations
 
Continuing Operations
Total future operating lease commitments:
 
 
 
 
Rental payments
 
$
729,940

 
$
958,872

Rental receipts
 
33,016

 
52,516

Future rental receipts on owned properties
 
24,985

 
53,907

Pledged assets
 
325,774

 
2,557,456

Future purchase and capital commitments:
 
 
 
 
Beverage agreements
 
52,301

 
175,249

Capital expenditures
 
5,316

 
12,879


In addition and as a result of the sale, Arby’s guarantees and other commitments as of January 2, 2011 that are separately disclosed in the combined notes to our consolidated financial statements included in the Form 10-K are no longer obligations of the Companies.

(3) Acquisitions and Other Dispositions

During the nine months ended October 2, 2011, Wendy’s acquired nine Wendy’s franchised restaurants in three separate acquisitions. The total consideration for these acquisitions before post closing adjustments was $7,673 consisting of (1) $6,613 of cash, net of $55 of cash acquired, and (2) the issuance of a note payable of $1,060. The total consideration was allocated to net tangible and identifiable intangible assets acquired, primarily properties, and liabilities assumed based on their estimated fair values with the excess of $3,689 recognized as goodwill. During the nine months ended October 2, 2011, Wendy’s also assumed the operations and management of four additional Wendy’s franchised restaurants.

During the nine months ended October 2, 2011, Wendy’s received proceeds from dispositions of $2,865 consisting of $1,125 from the sale of three company-owned Wendy’s restaurants to franchisees, $899 from the sale of surplus properties, and $841 related to other dispositions. These sales resulted in a net gain of $744 which is included as an offset to “Depreciation and amortization.”

During the nine months ended October 3, 2010, Wendy’s received proceeds from dispositions of $2,174 consisting of $1,123 from the sale of surplus properties, $821 from the sale of two company-owned Wendy’s restaurants, and $230 related to other dispositions. These sales resulted in a net gain of $1,292 which is included as an offset to “Depreciation and amortization.”

(4) DFR Notes

(The Wendy’s Company)

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 the Form 10-K. The proceeds represented 64.1% of the $47,986 aggregate principal amount of the DFR Notes.

During the fourth quarter of 2008, we recognized an allowance for collectability of $21,227 to reduce the then carrying amount of the notes to $24,983. As a result, we recognized income of $4,909 during the 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, net.”



15

THE WENDY’S COMPANY AND SUBSIDIARIES
WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)


(5) Investment in Joint Ventures

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 of accounting. 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 2,
2011
 
October 3,
2010
Balance at beginning of period (a)
$
98,631

 
$
97,476

 
 
 
 
Equity in earnings for the period
10,258

 
9,309

Amortization of purchase price adjustments
(2,170
)
 
(2,182
)
 
8,088

 
7,127

 

 

Distributions received
(10,784
)
 
(9,718
)
Currency translation adjustment included in “Comprehensive
   income”
(5,050
)
 
3,465

Balance at end of period (a)
$
90,885

 
$
98,350

_____________________
 
 
 
(a) Included in “Investments.”
 
 
 

Presented below is a summary of unaudited financial information of TimWen as of and for the nine months ended October 2, 2011 and October 3, 2010, respectively, in Canadian dollars. The summary balance sheet financial information does not distinguish between current and long-term assets and liabilities:

 
October 2,
2011
 
October 3,
2010
Balance sheet information:
 
 
 
Properties
C$
76,158

 
C$
80,011

Cash and cash equivalents
2,644

 
2,315

Accounts receivable
4,418

 
3,941

Other
2,628

 
3,011

 
C$
85,848

 
C$
89,278

 
 
 
 
Accounts payable and accrued liabilities
C$
1,541

 
C$
1,418

Other liabilities
8,975

 
8,844

Partners’ equity
75,332

 
79,016

 
C$
85,848

 
C$
89,278



16

THE WENDY’S COMPANY AND SUBSIDIARIES
WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

 
Nine Months Ended
 
October 2,
2011
 
October 3,
2010
Income statement information:
 
 
 
Revenues
C$
29,131

 
C$
28,620

Income before income taxes and net income
20,404

 
19,064


Investment in Joint Venture in Japan

During the second quarter of 2011, Wendy’s entered into a joint venture for the operation of Wendy’s restaurants in Japan (the “Japan JV”). Wendy’s 49% share of the joint venture is accounted for using the equity method of accounting. The Japan JV expects to open its first restaurant before the end of 2011.

As of October 2, 2011, the carrying value of our investment in the Japan JV was $912, which is included in “Investments.” For the nine months ended October 2, 2011, we recognized a loss of $271 which is included in “Other operating expense, net.”

(6) Fair Value of Financial Instruments

Below are the carrying amounts and estimated fair values of the Companies’ financial instruments for which the disclosure of fair values is required.
 
October 2, 2011
 
Wendy’s
Restaurants
 
Corporate
 
The Wendy’s Company
Financial assets
 
 
 
 
 
Carrying Amount:
 
 
 
 
 
Non-current cost investments
$
22,812

 
$
4,598

 
$
27,410

Interest rate swaps
13,014

 

 
13,014

 
 
 
 
 
 
Fair Value:
 
 
 
 
 
Non-current cost investments (a)
$
25,219

 
$
20,600

 
$
45,819

Interest rate swaps (b)
13,014

 

 
13,014


17

THE WENDY’S COMPANY AND SUBSIDIARIES
WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

 
October 2, 2011
 
Carrying
Amount
 
Fair
Value
Financial liabilities
 
 
 
Long-term debt, including current portion:
 
 
 
10% senior notes (c)
$
554,474

 
$
602,855

Wendy’s Restaurants term loan (c)
467,163

 
466,718

6.20% senior notes (c)
224,777

 
234,000

Sale-leaseback obligations (d)
1,460

 
1,732

Capitalized lease obligations (d)
14,151

 
15,585

7% debentures (c)
82,056

 
87,500

Other
1,060

 
1,088

Total Wendy’s Restaurants long-term debt, including current portion
1,345,141

 
1,409,478

6.54% aircraft term loan (d)
11,654

 
11,840

Total The Wendy’s Company long-term debt, including current portion
$
1,356,795

 
$
1,421,318

Guarantees of:
 
 
 
Franchisee loans obligations (e)
$
420

 
$
420

_______________
(a)
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 Companies relied on valuations performed by the investment managers or investees in valuing those investments or third-party appraisals.

(b)
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.

(c)
The fair values were based on quoted market prices.

(d)
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.

(e)
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 weighted average risk percentage established at the inception of each program.

The carrying amounts of cash and cash equivalents, accounts payable and accrued expenses approximated fair value due to the short-term maturities of those items. The carrying amounts of accounts and notes receivable (both current and non-current) approximated fair value due to the effect of related allowances for doubtful accounts and notes receivable.


18

THE WENDY’S COMPANY AND SUBSIDIARIES
WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

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

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

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

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

The following table presents the Companies’ financial assets and liabilities (other than cash and cash equivalents) measured at fair value on a recurring basis as of October 2, 2011 by the valuation hierarchy as defined in the fair value guidance:

 
 
 
Fair Value Measurements
 
October 2,
2011
 
Level 1
 
Level 2
 
Level 3
Interest rate swaps (included in “Deferred costs
     and other assets”)
$
13,014

 
$

 
$
13,014

 
$


The following table presents the fair values for those assets and liabilities of continuing operations measured at fair value during the nine months ended October 2, 2011 on a non-recurring basis. Total losses include losses recognized from all non-recurring fair value measurements during the nine months ended October 2, 2011. The carrying value of properties presented in the table below substantially represents the remaining carrying value of land for Wendy’s properties that were impaired in the first quarter of 2011. See Note 7 for more information on the impairment of our long-lived assets.
 
 
 
 
 
 
 
 
 
Nine Months
Ended
October 2, 2011
Total Losses

 
 
 
Fair Value Measurements
 
 
October 2,
2011
 
Level 1
 
Level 2
 
Level 3
 
Properties
$
575

 
$

 
$

 
$
575

 
$
6,449

Other intangible assets

 

 

 

 
1,813

 
$
575

 
$

 
$

 
$
575

 
$
8,262


Derivative instruments

The Companies’ derivative instruments in the third quarter of 2011 included interest rate swaps on Wendy’s 6.20% senior notes with notional amounts totaling $225,000 that were all designated as fair value hedges. At October 2, 2011 and January 2, 2011, the fair value of these interest rate swaps of $13,014 and $9,623, respectively, has been included in “Deferred costs and other assets” and as an adjustment to the carrying amount of the Wendy’s 6.20% senior notes.

Interest income on interest rate swaps was $1,402 and $4,250 for the three months and nine months ended October 2, 2011, respectively, and $1,320 and $6,396 for the three months and nine months ended October 3, 2010, respectively. In connection with the redemption of the Wendy’s 6.25% senior notes during the second quarter of 2010, we recognized a gain of $1,875 on the cancellation of four interest rate swaps with notional amounts totaling $175,000, which is included in the amounts above for the nine months ended October 3, 2010.



19

THE WENDY’S COMPANY AND SUBSIDIARIES
WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

(7) Impairment of Long-Lived Assets

Wendy’s company-owned restaurant impairment losses included in the table below for the nine months ended October 2, 2011 and the three months and nine months ended October 3, 2010 predominantly reflected impairment charges on restaurant level assets resulting from the deterioration in operating performance of certain restaurants and additional charges for capital improvements in restaurants impaired in prior years which did not subsequently recover. The Wendy’s impairment losses for the three months and nine months ended October 3, 2010 also included write-downs in the carrying value of certain surplus properties and properties held for sale.

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 in the table below were generally estimated based on the present values of the associated cash flows and on market value with respect to land (Level 3 inputs).

 
Three Months Ended
 
Nine Months Ended
 
October 2,
2011
 
October 3,
2010
 
October 2,
2011
 
October 3,
2010
 
 
 
 
 
 
 
 
Impairment of company-owned restaurants:

 

 
 
 
 
Properties
$

 
$
17,373

 
$
6,449

 
$
17,448

Intangible assets

 
3,548

 
1,813

 
3,955

 
$

 
$
20,921

 
$
8,262

 
$
21,403


Arby’s company-owned restaurant impairment losses of $6,488 and $20,021 for the three months and nine months ended October 3, 2010, respectively, predominantly reflected impairment charges on restaurant level assets resulting from the deterioration in operating performance of certain restaurants and additional charges for capital improvements in restaurants impaired in prior years which did not subsequently recover. These impairment losses represented the excess of the carrying amount over the fair value of the affected assets and are included in discontinued operations and not included in the table above.

The fair values of impaired assets were generally estimated based on the present values of the associated cash flows and on market value with respect to land (Level 3 inputs). Arby’s impairment losses for the period from January 3, 2011 through July 4, 2011 (its date of sale) were not significant. See Note 2 for more information on discontinued operations.

(8) Income Taxes

The Company’s effective tax rate for the three months ended October 2, 2011 and effective tax rate benefit for the three months ended October 3, 2010 was 41.0% and 91.2%, respectively. Wendy’s Restaurants effective tax rate for the three months ended October 2, 2011 and effective tax rate benefit for the three months ended October 3, 2010 was 39.6% and 108.2%, respectively. The Companies’ effective tax 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) tax credits, (3) adjustments related to prior year tax matters, and (4) 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 Company’s effective tax rate for the nine months ended October 2, 2011 and effective tax rate benefit for the nine months ended October 3, 2010 was 40.3% and 44.0%, respectively. Wendy’s Restaurants effective tax rate for the nine months ended October 2, 2011 and effective tax rate benefit for the nine months ended October 3, 2010 was 39.2% and 35.7%, respectively. The Companies’ effective tax 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) tax credits, (3) adjustments related to prior year tax matters, (4) 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, and (5) a reduction in our state valuation allowances in 2010.


20

THE WENDY’S COMPANY AND SUBSIDIARIES
WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

There were no significant changes to unrecognized tax benefits or related interest and penalties for either the Company or Wendy’s Restaurants for the nine month periods ended October 2, 2011 and October 3, 2010. Amounts payable for Federal and certain state income taxes are settled by Wendy’s Restaurants to The Wendy’s Company under a tax sharing agreement. During the nine months ended October 2, 2011 and October 3, 2010, Wendy’s Restaurants made tax sharing payments to The Wendy’s Company of $13,078 and $0, respectively.

(9) Income (Loss) Per Share

(The Wendy’s Company)

Basic income (loss) per share for the three months and nine months ended October 2, 2011 and October 3, 2010 was computed by dividing net income (loss) by the weighted average number of common shares outstanding.

The weighted average number of shares used to calculate basic and diluted income per share was as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 2,
2011
 
October 3,
2010
 
October 2,
2011
 
October 3,
2010
Common Stock:
 
 
 
 
 
 
 
Weighted average basic shares outstanding
395,677

 
417,985

 
410,624

 
428,968

Dilutive effect of stock options and restricted
     shares
2,222

 

 
1,619

 
1,006

Weighted average diluted shares outstanding
397,899

 
417,985

 
412,243

 
429,974


Diluted income (loss) per share for the three months and nine months ended October 2, 2011 and the nine months ended October 3, 2010 was computed by dividing income by the weighted average number of basic shares outstanding plus the potential common share effect of dilutive stock options and restricted shares, computed using the treasury stock method. For the three months and nine months ended October 2, 2011, we excluded 20,525 and 19,038, respectively, of potential common shares from our diluted income per share calculation as they would have had anti-dilutive effects. For the nine months ended October 3, 2010, we excluded 23,846 of potential common shares from our diluted income per share calculation as they would have had anti-dilutive effects. Diluted loss per share for the three months ended October 3, 2010 was the same as basic loss per share since we reported a loss from continuing operations and, therefore, the effect of all potentially dilutive securities would have been antidilutive.

As of October 2, 2011, our potential common shares consisted of the following: (1) outstanding stock options which can be exercised into 31,022 shares of our Common Stock and (2) 3,820 restricted stock units and other restricted stock awards.

(10) Debt and Equity

Debt

The Wendy’s Restaurants senior secured term loan facility (the “Term Loan”), which is part of the credit agreement entered into in May 2010 and is further described in the Form 10-K, requires prepayments of principal amounts resulting from certain events and on an annual basis from Wendy’s Restaurants excess cash flow as defined under the Term Loan. An excess cash flow payment for fiscal 2010 of $24,874 was paid in the first quarter of 2011. Wendy’s Restaurants was not required to utilize any portion of the proceeds from the sale of Arby’s described in Note 2 as a Term Loan prepayment.
    
In the second quarter of 2010 the Companies recognized a loss on early extinguishment of debt of $26,197 related to the repayment of debt from the proceeds of the Term Loan as discussed above. 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 Wendy’s Restaurants prior senior secured term loan.


21

THE WENDY’S COMPANY AND SUBSIDIARIES
WENDY’S RESTAURANTS, LLC AND SUBSIDIARIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands Except Per Share Amounts)

Stockholders’ Equity

(The Wendy’s Company)

The following is a summary of the changes in stockholders’ equity:
 
Nine Months Ended
 
October 2,
2011
 
October 3,
2010
Balance, beginning of year
$
2,163,174

 
$
2,336,339

Comprehensive (loss) income (a)
(6,858
)
 
14,347

Share-based compensation
13,756

 
10,519