Introduction and Executive Overview for Wendy's

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Wendy's International (WEN)

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WEN » Topics » Introduction and Executive Overview

This excerpt taken from the WEN 10-K filed Mar 1, 2007.

Introduction and Executive Overview

We currently operate in two business segments. We operate in the restaurant business through our franchised and Company-owned Arby’s restaurants and, effective with the July 2004 acquisition of Deerfield & Company LLC, which we refer to as Deerfield, in the asset management business.

On July 22, 2004 we completed the acquisition of a 63.6% capital interest in Deerfield, in a transaction we refer to as the Deerfield Acquisition. Deerfield, through its wholly-owned subsidiary Deerfield Capital Management LLC, is an asset manager offering a diverse range of fixed income and credit-related strategies to institutional investors. Deerfield provides asset management services for investors through (1) collateralized debt obligation vehicles, which we refer to as CDOs, and (2) investment funds and private investment accounts, which we refer to as Funds, including Deerfield Triarc Capital Corp., a real estate investment trust formed in December 2004, which we refer to as the REIT. Deerfield’s results of operations, less applicable minority interests, and cash flows are included in our 2004 consolidated results subsequent to the July 22, 2004 date of the Deerfield Acquisition and our 2005 and 2006 consolidated results for the full years. See below under “Presentation of Financial Information.”

On July 25, 2005 we completed the acquisition of substantially all of the equity interests or the assets of the entities comprising the RTM Restaurant Group, Arby’s largest franchisee with 775 Arby’s restaurants in 22 states as of that date, in a transaction we refer to as the RTM Acquisition. Accordingly, RTM’s results of operations and cash flows are included in our 2005 consolidated results subsequent to the July 25, 2005 date of the RTM Acquisition and are included in our 2006 consolidated results for the full year. Commencing on July 26, 2005, royalties and franchise and related fees from RTM are eliminated in consolidation.

In our restaurant business, we derive revenues in the form of royalties and franchise and related fees and from sales by our Company-owned restaurants. While 70% of our existing Arby’s royalty agreements and all of our new domestic royalty agreements provide for royalties of 4% of franchise revenues, our average royalty rate was 3.6% for the year ended December 31, 2006. In our asset management business, we derive revenues in the form of asset management and related fees from our management of CDOs, Funds and the REIT, and we may expand the types of investments that we offer and manage.

We derive investment income principally from the investment of our excess cash. In that regard, we invested in several funds managed by Deerfield, including Deerfield Opportunities Fund, LLC, which we refer to as the Opportunities Fund, and DM Fund LLC, which we refer to as the DM Fund. We invested $100.0 million in the Opportunities Fund in October 2004. We invested $4.8 million in the DM Fund in March 2005 through a partial transfer from our investment in the Opportunities Fund. We redeemed our investments in the Opportunities Fund and the DM Fund effective September 29, 2006 and December 31, 2006, respectively. The Opportunities Fund through September 29, 2006, and the DM Fund through December 31, 2006, were accounted for as consolidated subsidiaries of ours, with minority interests to the extent of participation by investors other than us. The Opportunities Fund was a multi-strategy hedge fund that principally invested in various fixed income securities and their derivatives and employed substantial leverage in its trading activities which significantly impacted our consolidated financial position, results of operations and cash flows. We also have an investment in the REIT which is managed by Deerfield. When we refer to Deerfield, we mean only Deerfield & Company, LLC and not the Opportunities Fund, the DM Fund or the REIT.

Our goal is to enhance the value of our Company by increasing the revenues of the Arby’s restaurant business and Deerfield’s asset management business. We are continuing to focus on growing the number of restaurants in the Arby’s system, adding new menu offerings and implementing operational initiatives targeted at improving service levels and convenience. We continue to grow Deerfield’s assets under management by

utilizing the value of its historically profitable investment advisory brand and increasing the types of assets under management, thereby increasing Deerfield’s asset management fee revenues.

We are continuing to explore a possible corporate restructuring involving our asset management business and other non-restaurant net assets. See “Liquidity and Capital Resources—Potential Corporate Restructuring” for a detailed discussion of the potential corporate restructuring and certain potential impacts thereof on our results of operations and our liquidity and capital resources.

In recent years our restaurant business has experienced the following trends:

•

Growing U.S. adult population, our principal customer demographic;

•

Addition of selected higher-priced quality items to menus, which appeal more to adult tastes;

•

Increased consumer preference for premium sandwiches with perceived higher levels of freshness, quality and customization along with increased competition in the premium sandwich category which has constrained the pricing of these products;

•

Increased price competition, as evidenced by (1) value menu concepts, which offer comparatively lower prices on some menu items, (2) combination meal concepts, which offer a complete meal at an aggregate price lower than the price of the individual food and beverage items, (3) the use of coupons and other price discounting and (4) many recent product promotions focused on the lower prices of certain menu items;

•

Increased competition among quick service restaurant competitors and other businesses for available development sites, higher development costs associated with those sites and higher borrowing costs in the lending markets typically used to finance new unit development;

•

Increased availability to consumers of new product choices, including additional healthy products focused on freshness driven by a greater consumer awareness of nutritional issues as well as new products that tend to include larger portion sizes and more ingredients, and a wider variety of snack products and non-carbonated beverages;

•

Competitive pressures from operators outside the quick service restaurant industry, such as the deli sections and in-store cafes of several major grocery store chains, convenience stores and casual dining outlets offering prepared food purchases;

•

Higher fuel prices, although moderating in recent months, which cause a decrease in many consumers’ discretionary income, increase our utility costs and are likely to increase the cost of commodities we purchase following the expiration in 2007 of our current distribution contracts which contain limits on distribution cost increases;

•

Extended hours of operation by many quick service restaurants including both breakfast and late night hours;

•

Federal, state and local legislative activity, such as minimum wage increases, mandated health and welfare benefits and restrictions on the use in prepared foods of certain unhealthy fatty acids, commonly referred to as trans fats, which could continue to result in increased wages and related fringe benefits, including health care and other insurance costs, higher packaging costs and higher food costs;

•

Competitive pressures from an increasing number of franchise opportunities seeking to attract qualified franchisees; and

•

Economically weak conditions in the Michigan and Ohio regions where a disproportionate number of our Company-owned restaurants are located.

We experience the effects of these trends directly to the extent they affect the operations of our Company-owned restaurants and indirectly to the extent they affect sales by our franchisees and, accordingly, the royalties and franchise fees we receive from them.

In recent years, our asset management business has experienced the following trends:

•

Growth in the hedge fund market as investors appear to have increased their investment allocations to hedge funds, with particular interest recently in hedge strategies that focus on specific areas of growth in domestic and foreign economies such as oil, commodities, interest rates,

equities and other specific areas, although such growth has moderated somewhat recently reflecting the recent performance of certain funds and the competitive market;

•

Increased demand for securities, partly due to an increase in the number of hedge funds, resulting in higher purchase prices of certain securities and, during periods of asset liquidation by those hedge funds, potentially lower sales prices, which can negatively impact our returns;

•

Short-term interest rates continue to increase more significantly than long-term interest rates, representing a flatter yield curve, resulting in higher funding costs for our securities purchases, which can negatively impact our margins within our managed funds, potentially lowering our asset management fees and assets under management; and

•

Increased merger and acquisition activity, resulting in additional risks and opportunities in the credit markets.

This excerpt taken from the WEN 10-K filed Apr 3, 2006.

Introduction and Executive Overview

We currently operate in two business segments. We operate in the restaurant business through our franchised and Company-owned Arby's restaurants and, effective with the July 2004 acquisition of Deerfield & Company LLC, which we refer to as Deerfield, in the asset management business.

On July 22, 2004 we completed the acquisition of a 63.6% capital interest in Deerfield, in a transaction we refer to as the Deerfield Acquisition. Deerfield, through its wholly-owned subsidiary Deerfield Capital Management LLC, is an asset manager offering a diverse range of fixed income and credit-related strategies to institutional investors. Deerfield provides asset management services for investors through (1) collateralized debt obligation vehicles, which we refer to as CDOs, and (2) investment funds and private investment accounts, which we refer to as Funds, including Deerfield Triarc Capital Corp., a real estate investment trust formed in December 2004, which we refer to as the REIT. Deerfield's results of operations, less applicable minority interests, and cash flows are included in our 2004 consolidated results subsequent to the July 22, 2004 date of the Deerfield Acquisition and the full 2005 fiscal year ended January 1, 2006. See below under “Presentation of Financial Information.”

On July 25, 2005 we completed the acquisition of substantially all of the equity interests or the assets of the entities comprising the RTM Restaurant Group, Arby's largest franchisee with 775 Arby's restaurants in 22 states as of that date, in a transaction we refer to as the RTM Acquisition. Commencing on July 26, 2005, our consolidated results of operations and cash flows include RTM's results of operations and cash flows but do not include royalties and franchise and related fees from RTM, which are now eliminated in consolidation. See below under “Liquidity and Capital Resources - RTM Acquisition” for a more detailed discussion of the RTM Acquisition. We refer to the 806 RTM restaurants open as of January 1, 2006, including 31 net restaurants added by RTM since the RTM Acquisition, as the RTM Stores. We refer to the 233 restaurants that we already owned before the RTM Acquisition through our subsidiary, Sybra, Inc., as the Sybra Stores.

In our restaurant business, we derive revenues in the form of royalties and franchise and related fees and from sales by our Company-owned restaurants. While over 60% of our existing Arby's royalty agreements and all of our new domestic royalty agreements provide for royalties of 4% of franchise revenues, our average royalty rate was 3.5% for the year ended January 1, 2006, excluding the RTM Stores. In our asset management business, we derive revenues in the form of asset management and related fees from our management of CDOs and Funds and we may expand the types of investments that we offer and manage.

We derived investment income throughout the periods presented principally from the investment of our excess cash. In that regard, in October 2004 we invested $100.0 million to seed a multi-strategy hedge fund, Deerfield Opportunities Fund, LLC, which we refer to as the Opportunities Fund, which is managed by Deerfield and currently accounted for as a consolidated subsidiary of ours, with minority interests to the extent of participation by investors other than us (see below under “Consolidation of Opportunities Fund”). When we refer to Deerfield or the effect of the Deerfield Acquisition, we mean only Deerfield & Company, LLC and not the Opportunities Fund. The Opportunities Fund principally invests in various fixed income securities and their derivatives, as opportunities arise, and employs leverage in its trading activities, including securities sold with an obligation to purchase or under agreements to repurchase. In March 2005 we withdrew $4.8 million of our investment from the Opportunities Fund to seed another new fund, named DM Fund, LLC, managed by Deerfield and consolidated by us with minority interests to the extent of participation by investors other than us.

Our goal is to enhance the value of our Company by increasing the revenues of the Arby's restaurant business and Deerfield's asset management business. We are continuing to focus on growing the number of restaurants in the Arby's system, adding new menu offerings and implementing operational initiatives targeted at service levels and convenience. We plan to grow Deerfield's assets under management by utilizing the value

of its historically profitable investment advisory brand and increasing the types of assets under management, such as the REIT, thereby increasing Deerfield's asset management fee revenues.

As discussed below under “Liquidity and Capital Resources - Investments and Potential Acquisitions,” we continue to evaluate our options for the use of our significant cash and investment position, including business acquisitions, repurchases of our common stock, investments and special cash dividends to our shareholders. In recent years we evaluated a number of business acquisition opportunities, including Deerfield and RTM, and we intend to continue our disciplined search for potential business acquisitions that we believe have the potential to create significant value to our shareholders.

We are continuing to explore the feasibility, as well as the risks and opportunities, of a possible corporate restructuring that may involve the spin-off to our shareholders or other disposition of our asset management operations. We are also reviewing options for our other remaining non-restaurant net assets, which could include the allocation of these net assets between our two businesses and/or special dividends or distributions to our shareholders, including the special cash dividends of $0.45 per share we have paid or currently intend to pay in 2006 as discussed in more detail below under “Liquidity and Capital Resources - Dividends.” The goal of our restructuring would be to enhance value to our shareholders by allowing them to hold shares in two industry-specific public companies thereby potentially unlocking the value of both independently-managed businesses.

In recent years our restaurant business has experienced the following trends:

	•	Growing U.S. adult population, our principal customer demographic;

	•	Addition of selected higher-priced quality items to menus, which appeal more to adult tastes;

	•	Increased consumer preference for premium sandwiches with perceived higher levels of freshness, quality and customization along with increased competition in the premium sandwich category which has constrained the pricing of these products;

	•	Increased price competition, as evidenced by value menu concepts, which offer comparatively lower prices on some menu items; combination meal concepts, which offer a complete meal at an aggregate price lower than the price of the individual food and beverage items; the use of coupons and other price discounting and many recent product promotions focused on the lower price of certain menu items;

	•	Increased competition among quick service restaurant competitors and other retail food operators for available development sites, higher development costs associated with those sites and increases in the cost of borrowing alternatives, primarily over the last six to nine months, in the lending markets typically used to finance new unit development;

	•	Increased availability to consumers of new product choices, including more healthy products focused on freshness driven by a greater consumer awareness of nutritional issues as well as new “indulgent” products that tend to have high calorie, high fat and/or high carbohydrate content, including a wider variety of snack products and non-carbonated beverages;

	•	Competitive pressures from operators outside the quick service restaurant industry, such as the deli sections and in-store cafes of several major grocery store chains, convenience stores and casual dining outlets offering prepared food purchases;

	•	Higher fuel prices which cause a decrease in many consumers' discretionary income;

	•	Extended hours of operation by many quick service restaurants including both breakfast and late night hours;

	•	Legislative activity on both the federal and state level, which could result in higher wages and related fringe benefits, including health care and other insurance costs, and higher packaging costs; and

	•	Competitive pressures from an increasing number of franchise opportunities seeking to attract qualified franchisees.

We experience the effects of these trends directly to the extent they affect the operations of our Company-owned restaurants and indirectly to the extent they affect sales by our franchisees and, accordingly, impact the royalties and franchise fees we receive from them.

In recent years, our asset management business has experienced the following trends, including trends prior to our entrance into the asset management business through the Deerfield Acquisition:

	•	Growth in the hedge fund market as investors appear to be increasing their investment allocations to hedge funds, with particular interest recently in hedge strategies that focus on specific areas of growth in domestic and foreign economies such as oil, commodities, interest rates, equities, and other specific areas;

	•	Increased competition in the hedge fund industry in the form of new hedge funds offered by both new and established asset managers to meet the increasing demand of hedge fund investors;

	•	Short-term interest rates that have risen over the last year while long-term interest rates essentially remained unchanged, representing a flatter yield curve, resulting in higher funding costs for our securities purchases, which can negatively impact our margins within our managed funds, potentially lowering our asset management fees; and

	•	Increased merger and acquisition activity, resulting in additional risks and opportunities in the credit markets.

EXCERPTS ON THIS PAGE:

10-K	Mar 1, 2007

10-K	Apr 3, 2006

Wendy's International (WEN)

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