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 will indirectly retain an 18.5% interest in Arby’s and the preliminary fair value of which is estimated to be $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 expects to make an election under §338(h)(10) of the Internal Revenue Code, which will have the effect of treating the transaction as a sale of assets and is expected to result in an approximate $240,000 ordinary loss for income tax purposes. If this election were not to be made, the sale of Arby’s common stock would result 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 will provide and be 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.

As a result of our sale of Arby’s on July 4, 2011, information related to Arby’s has been reflected in the accompanying condensed consolidated financial statements as follows:


•	Balance sheets - Arby’s assets and liabilities have been aggregated and classified as assets and liabilities of discontinued operations in our July 3, 2011 balance sheet. Arby’s assets and liabilities have not been so reclassified on our January 2, 2011 balance sheet;


•	Statements of income (loss) - Arby’s income (loss) from operations for all periods presented has been reclassified to discontinued operations (see further discussion below). Discontinued operations also includes our estimated loss on Arby’s disposal; and


•	Statements of cash flows - Arby’s cash flows for all periods presented have been included in, and not separately reported from, all our cash flows.

The Companies do not expect to have continuing operational involvement in Arby’s after the sale and future Arby’s results of operations and cash flows will be eliminated from the Companies’ financial statements. As a result, we classified Arby’s results of operations as discontinued operations for all periods presented. The condensed consolidated statements of income for the three months and six months ended July 3, 2011 and July 4, 2010 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 has been assumed by Buyer is included in discontinued operations; interest expense on Wendy’s Restaurants’ credit agreement, which is 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						Six Months Ended
	July 3, 2011			July 4, 2010			July 3, 2011			July 4, 2010
Revenues	$	281,094		$	269,587		$	546,453		$	522,320

(Loss) income from discontinued operations, net of income taxes:
Income (loss) from discontinued operations before income taxes	$	6,472		$	9,386		$	4,279		$	(6,943	)
(Provision for) benefit from income taxes	(2,800		)	(4,086		)	(1,720		)	1,532
	3,672			5,300			2,559			(5,411		)
Loss on disposal, net of income tax benefit	(3,780		)	—			(3,780		)	—
(Loss) income from discontinued operations	$	(108	)	$	5,300		$	(1,221	)	$	(5,411	)

The Companies have recorded an estimated pre-tax loss on disposal of Arby’s of $6,000 in the second quarter of 2011 based upon the preliminary valuation of our indirect retained interest and our current estimates of the transaction closing costs ($11,300) and post closing purchase price adjustments primarily related to working capital ($15,000). Such valuation and estimates are subject to change. The Companies have recognized a $2,220 tax benefit on the estimated pre-tax loss on disposal of Arby’s in the second quarter of 2011. In the third quarter of 2011, due to a permanent difference between the book and tax basis of Arby’s assets related to goodwill, the Companies will record a tax expense of approximately $5,500 in connection with completing the Arby’s sale.

The assets and liabilities of Arby’s are classified as assets and liabilities of discontinued operations as of July 3, 2011 as follows:



Cash and cash equivalents	$	7,076
Accounts and notes receivable	22,760
Inventories	10,373
Prepaid expenses and other current assets	15,328
Advertising fund restricted assets	10,788
Current assets of discontinued operations	$	66,325

Properties	$	366,825
Other intangible assets	26,782
Goodwill	17,617
Deferred costs and other assets	7,631
Noncurrent assets of discontinued operations	$	418,855

Current portion of long-term debt	$	9,687
Accounts payable	21,969
Accrued expenses and other current liabilities	68,468
Advertising fund restricted liabilities	10,788
Current liabilities of discontinued operations	$	110,912

Long-term debt	$	180,243
Deferred income	10,968
Other liabilities	54,500
Noncurrent liabilities of discontinued operations	$	245,711

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.