10-K 1 twc10k2012.htm 10-K TWC 10K 2012
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(X)
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED December 30, 2012
OR
( )
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO _______________

---------------------------------
THE WENDY’S COMPANY
(Exact name of registrants as specified in its charter)
---------------------------------
Commission file number: 1-2207

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)
Registrant’s Telephone Number, Including Area Code: (614) 764-3100
---------------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $.10 par value
 
The NASDAQ Stock Market LLC
 
 
 
Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [x] No [ ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [x]

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]



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]

The aggregate market value of common equity held by non-affiliates of The Wendy’s Company as of July 1, 2012 was approximately $1,327,737,274. As of February 22, 2013, there were 392,939,774 shares of The Wendy’s Company common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Form 10-K, to the extent not set forth herein, is incorporated herein by reference from The Wendy’s Company’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after December 30, 2012.
 




PART I

Special Note Regarding Forward-Looking Statements and Projections

This Annual Report on Form 10-K and oral statements made from time to time by representatives of the Company may contain or incorporate by reference certain statements that are not historical facts, including, most importantly, information concerning possible or assumed future results of operations of the Company.  Those statements, as well as statements preceded by, followed by, or that include the words “may,” “believes,” “plans,” “expects,” “anticipates,” or the negation thereof, or similar expressions, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”).  All statements that address future operating, financial or business performance; strategies or expectations; future synergies, efficiencies or overhead savings; anticipated costs or charges; future capitalization; and anticipated financial impacts of recent or pending transactions are forward-looking statements within the meaning of the Reform Act.  The forward-looking statements are based on our expectations at the time such statements are made, speak only as of the dates they are made and are susceptible to a number of risks, uncertainties and other factors.  Our actual results, performance and achievements may differ materially from any future results, performance or achievements expressed or implied by our forward-looking statements.  For all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Reform Act.  Many important factors could affect our future results and could cause those results to differ materially from those expressed in or implied by the forward-looking statements contained herein.  Such factors, all of which are difficult or impossible to predict accurately, and many of which are beyond our control, include, but are not limited to, the following:
    
competition, including pricing pressures, couponing, aggressive marketing and the potential impact of competitors’ new unit openings on sales of Wendy’s restaurants;

consumers’ perceptions of the relative quality, variety, affordability and value of the food products we offer;
 
food safety events, including instances of food-borne illness (such as salmonella or E. Coli) involving Wendy’s or its supply chain;
 
consumer concerns over nutritional aspects of beef, poultry, french fries or other products we sell, or concerns regarding the effects of disease outbreaks such as “mad cow disease” and avian influenza or “bird flu”;

the effects of negative publicity that can occur from increased use of social media;
 
success of operating and marketing initiatives, including advertising and promotional efforts and new product and concept development by us and our competitors;
 
the impact of general economic conditions and high unemployment rates on consumer spending, particularly in geographic regions that contain a high concentration of Wendy’s restaurants;
 
changes in consumer tastes and preferences, and in discretionary consumer spending;
 
changes in spending patterns and demographic trends, such as the extent to which consumers eat meals away from home;
   
certain factors affecting our franchisees, including the business and financial viability of franchisees, the timely payment of such franchisees’ obligations due to us or to national or local advertising organizations, and the ability of our franchisees to open new restaurants in accordance with their development commitments, including their ability to finance restaurant development and remodels;
 
changes in commodity costs (including beef, chicken and corn), labor, supply, fuel, utilities, distribution and other operating costs;
 
availability, location and terms of sites for restaurant development by us and our franchisees;
 
development costs, including real estate and construction costs;
 
delays in opening new restaurants or completing remodels of existing restaurants, including risks associated with the Image Activation program;
 

3


the timing and impact of acquisitions and dispositions of restaurants;
 
our ability to successfully integrate acquired restaurant operations;
 
anticipated or unanticipated restaurant closures by us and our franchisees;
 
our ability to identify, attract and retain potential franchisees with sufficient experience and financial resources to develop and operate Wendy’s restaurants successfully;
 
 availability of qualified restaurant personnel to us and to our franchisees, and the ability to retain such personnel;
 
our ability, if necessary, to secure alternative distribution of supplies of food, equipment and other products to Wendy’s restaurants at competitive rates and in adequate amounts, and the potential financial impact of any interruptions in such distribution;
 
availability and cost of insurance;
 
adverse weather conditions;
 
availability, terms (including changes in interest rates) and deployment of capital;
 
changes in, and our ability to comply with, legal, regulatory or similar requirements, including franchising laws, payment card industry rules, overtime rules, minimum wage rates, wage and hour laws, government-mandated health care benefits, tax legislation, federal ethanol policy and accounting standards;
 
the costs, uncertainties and other effects of legal, environmental and administrative proceedings;
 
the effects of charges for impairment of goodwill or for the impairment of other long-lived assets;
 
the effects of war or terrorist activities;

expenses and liabilities for taxes related to periods up to the date of sale of Arby’s as a result of the indemnification provisions of the Arby’s Purchase and Sale Agreement; and
 
other risks and uncertainties affecting us and our subsidiaries referred to in this Annual Report on Form 10-K (see especially “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”) and in our other current and periodic filings with the Securities and Exchange Commission.

All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.  New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us.  We assume no obligation to update any forward-looking statements after the date of this Annual Report on Form 10-K as a result of new information, future events or developments, except as required by Federal securities laws.  In addition, it is our policy generally not to endorse any projections regarding future performance that may be made by third parties.

Item 1. Business.

Introduction

The Wendy’s Company (“The Wendy’s Company”) is the parent company of its 100% owned subsidiary holding company Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). Wendy’s Restaurants is the parent company of Wendy’s International, Inc. (“Wendy’s”), which is the owner and franchisor of the Wendy’s® restaurant system in the United States. As used in this report, unless the context requires otherwise, the term “Company” refers to The Wendy’s Company and its direct and indirect subsidiaries.

As of December 30, 2012, the Wendy’s restaurant system was comprised of 6,560 restaurants, of which 1,427 were owned and operated by the Company. References in this Annual Report on Form 10-K (the “Form 10-K”) to restaurants that we “own” or that are “company-owned” include owned and leased restaurants. The Wendy’s Company’s corporate predecessor was incorporated in Ohio in 1929 and was reincorporated in Delaware in June 1994. Effective September 29, 2008, in conjunction

4


with the merger with Wendy’s, The Wendy’s Company’s corporate name was changed from Triarc Companies, Inc. (“Triarc”) to Wendy’s/Arby’s Group, Inc. Effective July 5, 2011, in connection with the sale of Arby’s Restaurant Group, Inc. (“Arby’s”), Wendy’s/Arby’s Group, Inc. changed its name to The Wendy’s Company. The Company’s principal executive offices are located at One Dave Thomas Blvd., Dublin, Ohio 43017, and its telephone number is (614) 764-3100. We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports, as well as our annual proxy statement, available, free of charge, on our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission. Our website address is www.aboutwendys.com. Information contained on that website is not part of this Form 10-K.

Merger with Wendy’s

On September 29, 2008, Triarc and Wendy’s completed their merger (the “Wendy’s Merger”) in an all-stock transaction in which Wendy’s shareholders received 4.25 shares of Wendy’s/Arby’s Class A common stock for each Wendy’s common share owned.

In the Wendy’s Merger, approximately 377,000,000 shares of Wendy’s/Arby’s Class A common stock were issued to Wendy’s shareholders.  In addition, effective on the date of the Wendy’s Merger, Wendy’s/Arby’s Class B common stock was converted into Class A common stock. In connection with the May 28, 2009 amendment and restatement of Wendy’s/Arby’s Certificate of Incorporation, Class A common stock was redesignated as “Common Stock.”

Sale of Arby’s

On July 4, 2011, Wendy’s Restaurants completed the sale of 100% of the common stock of Arby’s to ARG IH Corporation (“Buyer”), a wholly owned subsidiary of ARG Holding Corporation (“Buyer Parent”), for $130.0 million 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 $19.0 million. Buyer and Buyer Parent were formed for purposes of this transaction. The Buyer also assumed approximately $190.0 million of Arby’s debt, consisting primarily of capital lease and sale-leaseback obligations.

Fiscal Year

The Company uses a 52/53 week fiscal year convention whereby its fiscal year ends each year on the Sunday that is closest to December 31 of that year. Each fiscal year generally is comprised of four 13-week fiscal quarters, although in the years with 53 weeks, the fourth quarter represents a 14-week period.

Business Segments

The Company manages and internally reports its business geographically. The operation and franchising of Wendy’s restaurants in North America (defined as the United States and Canada) comprises virtually all of our current operations and represents a single reportable segment. The revenues and operating results of Wendy’s restaurants outside of North America are not material. See Note 26 of the Financial Statements and Supplementary Data included in Item 8 herein, for financial information attributable to our geographic areas.

The Wendy’s Restaurant System

Wendy’s is the world’s third largest quick-service restaurant company in the hamburger sandwich segment.

Wendy’s is primarily engaged in the business of operating, developing and franchising a system of distinctive quick-service restaurants serving high quality food. At December 30, 2012, there were 6,186 Wendy’s restaurants in operation in North America. Of these restaurants, 1,427 were operated by Wendy’s and 4,759 by a total of 439 franchisees. In addition, at December 30, 2012, there were 374 franchised Wendy’s restaurants in operation in 26 countries and territories other than North America. See “Item 2. Properties” for a listing of the number of company-owned and franchised locations in the United States and in foreign countries and United States territories.

The revenues from our restaurant business are derived from three principal sources: (1) sales at company-owned restaurants; (2) sales from our company-owned bakery; and (3) franchise royalties received from Wendy’s franchised restaurants.


5


Wendy’s is also a 50% partner in a Canadian restaurant real estate joint venture with Tim Hortons Inc., a quick-service restaurant chain. The joint venture owns Wendy’s/Tim Hortons combo units in Canada. As of December 30, 2012, there were 105 Wendy’s restaurants in operation that were owned by the joint venture.

During the second quarter of 2011, Wendy’s became a 49% partner in a joint venture for the operation of Wendy’s restaurants in Japan. As of December 30, 2012, there were two Wendy’s restaurants operated by this joint venture.

Wendy’s Restaurants

Wendy’s opened its first restaurant in Columbus, Ohio in 1969. During 2012, Wendy’s opened 16 new company-owned restaurants and closed 32 generally underperforming company-owned restaurants. In addition, Wendy’s purchased 56 restaurants from its franchisees and disposed of 30 restaurants to franchisees. During 2012, Wendy’s franchisees opened 85 new restaurants and closed 103 generally underperforming restaurants.

The following table sets forth the number of Wendy’s restaurants at the beginning and end of each year from 2010 to 2012:
 
2012
 
2011
 
2010
Restaurants open at beginning of period
6,594

 
6,576

 
6,541

Restaurants opened during period
101

 
89

 
78

Restaurants closed during period
(135
)
 
(71
)
 
(43
)
Restaurants open at end of period
6,560

 
6,594

 
6,576


During the period from January 4, 2010, through December 30, 2012, 268 Wendy’s restaurants were opened and 249 generally underperforming Wendy’s restaurants were closed.

Operations

Each Wendy’s restaurant offers an extensive menu specializing in hamburger sandwiches and featuring filet of chicken breast sandwiches, which are prepared to order with the customer’s choice of condiments. Wendy’s menu also includes chicken nuggets, chili, french fries, baked potatoes, freshly prepared salads, soft drinks, Frosty™ desserts and kids’ meals. In addition, the restaurants sell a variety of promotional products on a limited time basis. Wendy’s also offers breakfast in some restaurants in the United States, although Wendy’s announced in January 2013 that it was discontinuing the breakfast daypart at certain restaurants.

Free-standing Wendy’s restaurants generally include a pick-up window in addition to a dining room. The percentage of sales at company-owned Wendy’s restaurants through the pick-up window was 65.3%, 65.1% and 64.9% in 2012, 2011, and 2010, respectively.

Wendy’s strives to maintain quality and uniformity throughout all restaurants by publishing detailed specifications for food products, preparation and service, continual in-service training of employees, restaurant operational audits and field visits from Wendy’s supervisors. In the case of franchisees, field visits are made by Wendy’s personnel who review operations, including quality, service and cleanliness and make recommendations to assist in compliance with Wendy’s specifications.

Generally, Wendy’s does not sell food or supplies, other than sandwich buns, to its franchisees. However, prior to 2010, Wendy’s arranged for volume purchases of many food and supply products. Commencing in 2010, the purchasing function was transferred to a new purchasing co-op as described below in “Raw Materials and Purchasing.”
    
The New Bakery Co. of Ohio, Inc. (the “Bakery”), a 100% owned subsidiary of Wendy’s, is a producer of buns for some Wendy’s restaurants, and to a lesser extent for outside parties. At December 30, 2012, the Bakery supplied 784 restaurants operated by Wendy’s and 2,152 restaurants operated by franchisees. The Bakery also produces and sells some products to customers in the grocery and other food service businesses.
 
Raw Materials and Purchasing

As of December 30, 2012, five independent processors (five total production facilities) supplied all of Wendy’s hamburger in the United States. In addition, six independent processors (eight total production facilities) supplied all of Wendy’s chicken in the United States.


6


Wendy’s and its franchisees have not experienced any material shortages of food, equipment, fixtures or other products that are necessary to maintain restaurant operations. Wendy’s anticipates no such shortages of products and believes that alternate suppliers are available. Suppliers to the Wendy’s system must comply with United States Department of Agriculture (“USDA”) and United States Food and Drug Administration (“FDA”) regulations governing the manufacture, packaging, storage, distribution and sale of all food and packaging products.

During the 2009 fourth quarter, Wendy’s entered into a purchasing co-op relationship agreement (the “Wendy’s Co-op”) with its franchisees to establish Quality Supply Chain Co-op, Inc. (“QSCC”). QSCC manages, for the Wendy’s system in the United States and Canada, contracts for the purchase and distribution of food, proprietary paper, operating supplies and equipment under national contracts with pricing based upon total system volume.

QSCC’s supply chain management facilitates the continuity of supply and provides consolidated purchasing efficiencies while monitoring and seeking to minimize possible obsolete inventory throughout the Wendy’s supply chain in the United States and Canada. Prior to 2010, the system’s purchasing function was performed and paid for by Wendy’s. In order to facilitate the orderly transition of the 2010 purchasing function for operations in the United States and Canada, Wendy’s transferred certain contracts, assets and certain Wendy’s purchasing employees to QSCC in 2010.  Pursuant to the terms of the Wendy’s Co-op, Wendy’s expensed $15.5 million in 2009 for payments to QSCC required over an 18 month period through May 2011 in order to provide funding for start-up costs, operating expenses and cash reserves. Since the third quarter of 2010, all QSCC members (including Wendy’s) pay sourcing fees to third party vendors on products which are sourced through QSCC. Such sourcing fees are remitted by these vendors to QSCC and are the primary means of funding QSCC’s operations. Should QSCC’s sourcing fees exceed its expected needs, QSCC’s board of directors may return some or all of the excess to its members in the form of a patronage dividend.
 
Trademarks and Service Marks

Wendy’s or its subsidiaries have registered certain trademarks and service marks in the United States Patent and Trademark Office and in international jurisdictions, some of which include Wendy’s®, Old Fashioned Hamburgers® and Quality Is Our Recipe®. Wendy’s believes that these and other related marks are of material importance to its business. Domestic trademarks and service marks expire at various times from 2013 to 2022, while international trademarks and service marks have various durations of 10 to 15 years. Wendy’s generally intends to renew trademarks and service marks that are scheduled to expire.

Wendy’s entered into an Assignment of Rights Agreement with the company’s founder, R. David Thomas, and his wife dated as of November 5, 2000 (the “Assignment”). Wendy’s had used Mr. Thomas, who was Senior Chairman of the Board until his death on January 8, 2002, as a spokesperson and focal point for its products and services for many years. With the efforts and attributes of Mr. Thomas, Wendy’s has, through its extensive investment in the advertising and promotional use of Mr. Thomas’ name, likeness, image, voice, caricature, endorsement rights and photographs (the “Thomas Persona”), made the Thomas Persona well known in the United States and throughout North America and a valuable asset for both Wendy’s and Mr. Thomas’ estate. Under the terms of the Assignment, Wendy’s acquired the entire right, title, interest and ownership in and to the Thomas Persona, including the sole and exclusive right to commercially use the Thomas Persona.
 
Seasonality

Wendy’s restaurant operations are moderately seasonal. Wendy’s average restaurant sales are normally higher during the summer months than during the winter months. Because the business is moderately seasonal, results for any quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year.
 
Competition

Each Wendy’s restaurant is in competition with other food service operations within the same geographical area. The quick-service restaurant segment is highly competitive and includes well-established competitors. Wendy’s competes with other restaurant companies and food outlets, primarily through the quality, variety, convenience, price, and value perception of food products offered. The number and location of units, quality and speed of service, attractiveness of facilities, effectiveness of marketing and new product development by Wendy’s and its competitors are also important factors. The price charged for each menu item may vary from market to market (and within markets) depending on competitive pricing and the local cost structure. Wendy’s also competes within the food service industry and the quick service restaurant sector not only for customers, but also for personnel, suitable real estate sites and qualified franchisees.
 
Wendy’s competitive position is differentiated by a focus on quality, its use of fresh, never frozen ground beef in the United States and Canada and certain other countries, its unique and diverse menu, its promotional products, its choice of condiments and

7


the atmosphere and decor of its restaurants. Wendy’s has initiated an Image Activation program, which includes innovative exterior and interior restaurant designs, and plans to accelerate that program in 2013 and beyond.

Many of the leading restaurant chains continue to focus on new unit development as one strategy to increase market share through increased consumer awareness and convenience. This results in increased competition for available development sites and higher development costs for those sites. Competitors also employ marketing strategies such as frequent use of price discounting, frequent promotions and heavy advertising expenditures. Continued price discounting, including the use of coupons, in the quick service restaurant industry and the emphasis on value menus has had and could continue to have an adverse impact on Wendy’s. In addition, we believe that the growth of fast casual chains and other in-line competitors causes some fast food customers to “trade up” to a more traditional dining out experience while keeping the benefits of quick service dining.

Other restaurant chains have also competed by offering high quality sandwiches made with fresh ingredients and artisan breads and there are several emerging restaurant chains featuring high quality food served at in-line locations. Several chains have also sought to compete by targeting certain consumer groups, such as capitalizing on trends toward certain types of diets (e.g., low carbohydrate or low trans fat) by offering menu items that are promoted as being consistent with such diets.

Additional competitive pressures for prepared food purchases come from operators outside the restaurant industry. A number of major grocery chains offer fresh deli sandwiches and fully prepared food and meals to go as part of their deli sections. Some of these chains also have in-store cafes with service counters and tables where consumers can order and consume a full menu of items prepared especially for that portion of the operation. Additionally, convenience stores and retail outlets at gas stations frequently offer sandwiches and other foods.

Quality Assurance

Wendy’s quality assurance program is designed to verify that the food products supplied to our restaurants are processed in a safe, sanitary environment and in compliance with our food safety and quality standards. Wendy’s quality assurance personnel conduct multiple on-site sanitation and production audits throughout the year at all of our core menu product processing facilities, which include beef, poultry, pork, buns, french fries, Frosty™ dessert ingredients, and produce. Animal welfare audits are also conducted every year at all beef, poultry, and pork facilities to confirm compliance with our required animal welfare and handling policies and procedures. In addition to our facility audit program, weekly samples of beef, poultry, and other core menu products from our distribution centers are randomly sampled and analyzed by a third party laboratory to test conformance to our quality specifications. Each year, Wendy’s representatives conduct unannounced inspections of all company and franchise restaurants to test conformance to our sanitation, food safety, and operational requirements. Wendy’s has the right to terminate franchise agreements if franchisees fail to comply with quality standards.
 
Acquisitions and Dispositions of Wendy’s Restaurants

Wendy’s has from time to time acquired the interests of and sold Wendy’s restaurants to franchisees. Wendy’s intends to evaluate strategic acquisitions of franchised restaurants and strategic dispositions of company-owned restaurants to existing and new franchisees. Wendy’s generally retains a right of first refusal in connection with any proposed sale of a franchisee’s interest.
 
Franchised Restaurants

As of December 30, 2012, Wendy’s franchisees operated 4,759 Wendy’s restaurants in 49 states, the District of Columbia and Canada.

The rights and obligations governing the majority of franchised restaurants operating in the United States are set forth in the Wendy’s Unit Franchise Agreement (non-traditional locations may operate under an amended agreement). This document provides the franchisee the right to construct, own and operate a Wendy’s restaurant upon a site accepted by Wendy’s and to use the Wendy’s system in connection with the operation of the restaurant at that site. The Unit Franchise Agreement provides for a 20-year term and a 10-year renewal subject to certain conditions. Wendy’s has in the past franchised under different agreements on a multi-unit basis; however, Wendy’s now generally grants new Wendy’s franchises on a unit-by-unit basis.

The Wendy’s Unit Franchise Agreement requires that the franchisee pay a royalty of 4% of monthly sales, as defined in the agreement, from the operation of the restaurant or $1,000, whichever is greater. The agreement also typically requires that the franchisee pay Wendy’s an initial technical assistance fee. In the United States, the standard technical assistance fee required under a newly executed Unit Franchise Agreement is currently $25,000 for each restaurant.


8


The technical assistance fee is used to defray some of the costs to Wendy’s in providing technical assistance in the development of the Wendy’s restaurant, initial training of franchisees or their operator and in providing other assistance associated with the opening of the Wendy’s restaurant. In certain limited instances (like the regranting of franchise rights or the relocation of an existing restaurant), Wendy’s may charge a reduced technical assistance fee or may waive the technical assistance fee. Wendy’s does not select or employ personnel on behalf of franchisees.

Wendy’s Restaurants of Canada Inc. (“WROC”), a 100% owned subsidiary of Wendy’s, holds master franchise rights for Canada. The rights and obligations governing the majority of franchised restaurants operating in Canada are set forth in a Single Unit Sub-Franchise Agreement. This document provides the franchisee the right to construct, own and operate a Wendy’s restaurant upon a site accepted by WROC and to use the Wendy’s system in connection with the operation of the restaurant at that site. The Single Unit Sub-Franchise Agreement provides for a 20-year term and a 10-year renewal subject to certain conditions. The sub-franchisee pays to WROC a monthly royalty of 4% of sales, as defined in the agreement, from the operation of the restaurant or C$1,000, whichever is greater. The agreement also typically requires that the franchisee pay WROC an initial technical assistance fee. The standard technical assistance fee is currently C$35,000 for each restaurant.

In order to promote new unit development, Wendy’s has established a franchisee assistance program for its North American franchisees that provides (with certain exceptions) for reduced technical assistance fees and a sliding scale of royalties for the first two years of operation for qualifying locations opened between April 1, 2011 and December 31, 2013. In addition, WROC has established a lease guarantee program to promote new franchisee unit development for up to an aggregate of C$5.0 million for periods of up to five years. Franchisees pay WROC a nominal fee for the guarantee.

In order to encourage franchisees to participate in Wendy’s Image Activation program, which include innovative exterior and interior restaurant designs for new and reimaged restaurants, Wendy’s initiated a cash incentive program for franchisees in the third quarter of 2012. In January 2013, the program was expanded to include variable cash incentives for Tier 1, 2, and 3 remodels and to allow for a maximum of $100,000 each, for up to three incentives per franchisee. The cash incentive program is for the reimaging of restaurants completed in 2013 and totals $10.0 million.

See “Management Discussion and Analysis - Liquidity and Capital Resources - Guarantees and Other Contingencies” in Item 7 herein, for further information regarding guarantee obligations.

Franchised restaurants are required to be operated under uniform operating standards and specifications relating to the selection, quality and preparation of menu items, signage, decor, equipment, uniforms, suppliers, maintenance and cleanliness of premises and customer service. Wendy’s monitors franchisee operations and inspects restaurants periodically to ensure that required practices and procedures are being followed.

See Note 6 and Note 22 of the Financial Statements and Supplementary Data included in Item 8 herein, and the information under “Management’s Discussion and Analysis” in Item 7 herein, for further information regarding reserves, commitments and contingencies involving franchisees.
 
Advertising and Marketing

In the United States and Canada, Wendy’s advertises nationally through national advertising funds on network and cable television programs, including nationally televised events.  Locally in the United States and Canada, Wendy’s primarily advertises through regional network and cable television, radio and newspapers. Wendy’s participates in two national advertising funds established to collect and administer funds contributed for use in advertising through television, radio, newspapers, the Internet and a variety of promotional campaigns, including the increasing use of social media. Separate national advertising funds are administered for Wendy’s United States and Canadian locations. Contributions to the national advertising funds are required to be made from both company-owned and franchised restaurants and are based on a percent of restaurant retail sales. In addition to the contributions to the national advertising funds, Wendy’s requires additional contributions to be made for both company-owned and franchised restaurants based on a percent of restaurant retail sales for the purpose of local and regional advertising programs. Required franchisee contributions to the national advertising funds and for local and regional advertising programs are governed by the Wendy’s Unit Franchise Agreement. Required contributions by company-owned restaurants for advertising and promotional programs are at the same percent of retail sales as franchised restaurants within the Wendy’s system. As of December 30, 2012, the contribution rate for United States restaurants is generally 3.25% of retail sales for national advertising and .75% of retail sales for local and regional advertising. Prior to January 1, 2012, the rates were generally 3% and 1%, respectively. The contribution rate for Canadian restaurants is generally 3% of retail sales for national advertising and 1% of retail sales for local and regional advertising. See Note 25 of the Financial Statements and Supplementary Data included in Item 8 herein, for further information regarding advertising.

9


International Operations and Franchising

As of December 30, 2012, Wendy’s had 374 franchised restaurants in 26 countries and territories other than the United States and Canada. Wendy’s intends to grow its international business aggressively, yet responsibly. Since the beginning of 2009, development agreements have been announced for Wendy’s locations to be opened in the following countries and territories: Singapore, the Middle East, North Africa, the Russian Federation, the Eastern Caribbean, Argentina, Japan, Georgia and the Republic of Azerbaijan. These development agreements include rights for 21 countries in which no Wendy’s restaurants were open as of December 30, 2012. In addition to new market expansion, further development within existing markets will continue to be an important component of Wendy’s international strategy over the coming years. In 2012, Wendy’s announced new development agreements in the existing markets of Indonesia and Philippines. Wendy’s has granted development rights in certain countries and territories listed under Item 2 of this Form 10-K.
 
Franchisees who wish to operate Wendy’s restaurants outside the United States and Canada enter into agreements with Wendy’s that generally provide franchise rights for each restaurant for an initial term of 10 years or 20 years, depending on the country, and typically include a 10-year renewal provision, subject to certain conditions. The agreements license the franchisee to use the Wendy’s trademarks and know-how in the operation of a Wendy’s restaurant at a specified location. Generally, the franchisee pays Wendy’s an initial technical assistance fee or other per restaurant fee and monthly fees based on a percentage of gross monthly sales of each restaurant. In certain foreign markets, Wendy’s may grant the franchisee exclusivity to develop a territory in exchange for the franchisee undertaking to develop a specified number of new Wendy’s restaurants in the territory based on a negotiated schedule. In these instances, the franchisee generally pays Wendy’s an upfront development fee, annual development fees or a per restaurant fee. In certain circumstances, Wendy’s may grant a franchisee the right to sub-franchise in a stated territory, subject to certain conditions.

In 2011, Wendy’s entered into a joint venture to develop restaurants in Japan. Wendy’s also continually evaluates non-franchise opportunities for development of Wendy’s restaurants in other international markets, including through joint ventures with third parties and opening company-owned restaurants.
General

Governmental Regulations

Various state laws and the Federal Trade Commission regulate Wendy’s franchising activities. The Federal Trade Commission requires that franchisors make extensive disclosure to prospective franchisees before the execution of a franchise agreement. Several states require registration and disclosure in connection with franchise offers and sales and have “franchise relationship laws” that limit the ability of franchisors to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. In addition, Wendy’s and its franchisees must comply with the federal Fair Labor Standards Act and similar state and local laws, the Americans with Disabilities Act (the “ADA”), which requires that all public accommodations and commercial facilities meet federal requirements related to access and use by disabled persons, and various state and local laws governing matters that include, for example, the handling, preparation and sale of food and beverages, the provision of nutritional information on menu boards, minimum wages, overtime and other working and safety conditions. Compliance with the ADA requirements could require removal of access barriers and non-compliance could result in imposition of fines by the United States government or an award of damages to private litigants. We do not believe that costs relating to compliance with the ADA will have a material adverse effect on the Company’s consolidated financial position or results of operations. We cannot predict the effect on our operations, particularly on our relationship with franchisees, of any pending or future legislation.

Changes in government-mandated health care benefits under the Patient Protection and Affordable Care Act (“PPACA”) are also anticipated to increase our costs and the costs of our franchisees. Our Compliance with the PPACA may result in significant modifications to our employment and benefits policies and practices.  Because of the absence of final implementing regulations, we currently cannot predict the timing or amount of those cost increases or modifications to our business practices. However, the cost increases may be material and such modifications to our business practices may be disruptive to our operations and impact our ability to attract and retain personnel.

Environmental and Other Matters

The Company’s past and present operations are governed by federal, state and local environmental laws and regulations concerning the discharge, storage, handling and disposal of hazardous or toxic substances. These laws and regulations provide for significant fines, penalties and liabilities, sometimes without regard to whether the owner or operator of the property knew of, or was responsible for, the release or presence of the hazardous or toxic substances. In addition, third parties may make claims

10


against owners or operators of properties for personal injuries and property damage associated with releases of hazardous or toxic substances. We cannot predict what environmental legislation or regulations will be enacted in the future or how existing or future laws or regulations will be administered or interpreted. We similarly cannot predict the amount of future expenditures that may be required to comply with any environmental laws or regulations or to satisfy any claims relating to environmental laws or regulations. We believe that our operations comply substantially with all applicable environmental laws and regulations. Accordingly, the environmental matters in which we are involved generally relate either to properties that our subsidiaries own, but on which they no longer have any operations, or properties that we or our subsidiaries have sold to third parties, but for which we or our subsidiaries remain liable or contingently liable for any related environmental costs. Our company-owned Wendy’s restaurants have not been the subject of any material environmental matters. Based on currently available information, including defenses available to us and/or our subsidiaries, and our current reserve levels, we do not believe that the ultimate outcome of the environmental matters in which we are involved will have a material adverse effect on our consolidated financial position or results of operations.
    
The Company is involved in litigation and claims incidental to our current and prior businesses. We provide reserves for such litigation and claims when payment is probable and reasonably estimable. We believe we have adequate reserves for continuing operations for all of our legal and environmental matters. We cannot estimate the aggregate possible range of loss due to most proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur, and significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral decisions is thus inherently difficult. Based on our 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 effect on our consolidated financial position or results of operations.

Employees

As of December 30, 2012, the Company had approximately 44,000 employees, including approximately 2,800 salaried employees and approximately 41,200 hourly employees. We believe that our employee relations are satisfactory.

Item 1A.  Risk Factors.

We wish to caution readers that in addition to the important factors described elsewhere in this Form 10-K, we have included below the most significant factors that have affected, or in the future could affect, our actual results and could cause our actual consolidated results during 2013, and beyond, to differ materially from those expressed in any forward-looking statements made by us or on our behalf.

Our success depends in part upon the continued retention of certain key personnel.

There were a number of changes in our senior management team in 2011 and 2012, including the appointment of a new President and Chief Executive Officer. We believe that over time our success has been dependent to a significant extent upon the efforts and abilities of our senior management team. The failure by us to retain members of our senior management team in the future could adversely affect our ability to build on the efforts we have undertaken to increase the efficiency and profitability of our businesses.

Competition from other restaurant companies, or poor customer experience at Wendy's restaurants, could hurt our brand.

The market segments in which company-owned and franchised Wendy’s restaurants compete are highly competitive with respect to, among other things, price, food quality and presentation, service, location, convenience, and the nature and condition of the restaurant facility. If customers have a poor experience at a Wendy’s restaurant, whether at a company-owned or franchised restaurant, we may experience a decrease in guest traffic. Further, Wendy’s restaurants compete with a variety of locally-owned restaurants, as well as competitive regional and national chains and franchises. Several of these chains compete by offering menu items that are targeted at certain consumer groups or dietary trends. Additionally, many of our competitors have introduced lower cost, value meal menu options. Our revenues and those of our franchisees may be hurt by this product and price competition.

Moreover, new companies, including operators outside the quick service restaurant industry, may enter our market areas and target our customer base. For example, additional competitive pressures for prepared food purchases have come from deli sections and in-store cafes of a number of major grocery store chains, as well as from convenience stores and casual dining outlets. Such competitors may have, among other things, lower operating costs, better locations, better facilities, better management, better products, more effective marketing and more efficient operations. Many of our competitors have substantially greater financial,

11


marketing, personnel and other resources than we do, which may allow them to react to changes in pricing and marketing strategies in the quick service restaurant industry better than we can. Many of our competitors spend significantly more on advertising and marketing than we do, which may give them a competitive advantage through higher levels of brand awareness among consumers. All such competition may adversely affect our revenues and profits by reducing revenues of company-owned restaurants and royalty payments from franchised restaurants.

Changes in consumer tastes and preferences, and in discretionary consumer spending, could result in a decline in sales at company-owned restaurants and in the royalties that we receive from franchisees.

The quick service restaurant industry is often affected by changes in consumer tastes, national, regional and local economic conditions, discretionary spending priorities, demographic trends, traffic patterns and the type, number and location of competing restaurants. Our success depends to a significant extent on discretionary consumer spending, which is influenced by general economic conditions and the availability of discretionary income. Accordingly, we may experience declines in sales during economic downturns. Any material decline in the amount of discretionary spending or a decline in consumer food-away-from-home spending could hurt our revenues, results of operations, business and financial condition.

If company-owned and franchised restaurants are unable to adapt to changes in consumer preferences and trends, company-owned and franchised restaurants may lose customers and the resulting revenues from company-owned restaurants and the royalties that we receive from franchisees may decline.

The disruptions in the national and global economies may adversely impact our revenues, results of operations, business and financial condition.

The disruptions in the national and global economies have resulted in high unemployment rates and declines in consumer confidence and spending.  If such conditions persist, they may result in significant declines in consumer food-away-from-home spending and customer traffic in our restaurants and those of our franchisees.  There can be no assurance that government responses to the disruptions will restore consumer confidence.  Ongoing disruptions in the national and global economies may adversely impact our revenues, results of operations, business and financial condition.

Changes in commodity costs (including beef, chicken and corn), supply, fuel, utilities, distribution and other operating costs could harm results of operations.

Our profitability depends in part on our ability to anticipate and react to changes in commodity costs (including beef, chicken and corn), supply, fuel, utilities, distribution and other operating costs. Any increase in these costs, especially beef or chicken prices, could harm operating results. In addition, our brand is susceptible to increases in these costs as a result of other factors beyond its control, such as weather conditions, global demand, food safety concerns, product recalls and government regulations. Additionally, prices for feed ingredients used to produce beef and chicken could be adversely affected by changes in global weather patterns, which are inherently unpredictable, and by federal ethanol policy. Increases in gasoline prices would result in the imposition of fuel surcharges by our distributors, which would increase our costs. Significant increases in gasoline prices could also result in a decrease in customer traffic at our restaurants, which could adversely affect our business. We cannot predict whether we will be able to anticipate and react to changing food costs by adjusting our purchasing practices and menu prices, and a failure to do so could adversely affect our operating results. In addition, we may not seek to or be able to pass along price increases to our customers.

Shortages or interruptions in the supply or delivery of perishable food products could damage the Wendy’s brand reputation and adversely affect our operating results.
 
Wendy’s and its franchisees are dependent on frequent deliveries of perishable food products that meet brand specifications. Shortages or interruptions in the supply of perishable food products caused by unanticipated demand, problems in production or distribution, disease or food-borne illnesses, inclement weather or other conditions could adversely affect the availability, quality and cost of ingredients, which could lower our revenues, increase operating costs, damage brand reputation and otherwise harm our business and the businesses of our franchisees.


12


Food safety events, including instances of food-borne illness (such as salmonella or E. Coli) involving Wendy’s or its supply chain, could create negative publicity and adversely affect sales and operating results.

Food safety is a top priority, and we dedicate substantial resources to ensure that our customers enjoy safe, quality food products. However, food safety events, including instances of food-borne illness (such as salmonella or E. Coli), have occurred in the food industry in the past, and could occur in the future.
 
Food safety events could adversely affect the price and availability of beef, poultry or other meats. As a result, Wendy’s restaurants could experience a significant increase in food costs if there are food safety events whether or not such events involve Wendy’s restaurants or restaurants of competitors.

In addition, food safety events, whether or not involving Wendy’s, could result in negative publicity for Wendy’s or for the industry or market segments in which we operate. Increased use of social media could create and/or amplify the effects of negative publicity. This negative publicity, as well as any other negative publicity concerning types of food products Wendy’s serves, may reduce demand for Wendy’s food and could result in a decrease in guest traffic to our restaurants as consumers shift their preferences to our competitors or to other products or food types. A decrease in guest traffic to our restaurants as a result of these health concerns or negative publicity could result in a decline in sales and operating results at company-owned restaurants or in royalties from sales at franchised restaurants.

Consumer concerns regarding the nutritional aspects of beef, poultry, french fries or other products we sell or concerns regarding the effects of disease outbreaks such as “mad cow disease” and avian influenza or “bird flu,” could affect demand for our products.

Consumer concerns regarding the nutritional aspects of beef, poultry, french fries or other products we sell or concerns regarding the effects of disease outbreaks such as “mad cow disease” and avian influenza or “bird flu,” could result in less demand for our products and a decline in sales at company-owned restaurants and in the royalties that we receive from franchisees.

Increased use of social media could create and/or amplify the effects of negative publicity and adversely affect sales and operating results.

Events reported in the media, including social media, whether or not accurate or involving Wendy’s, could create and/or amplify negative publicity for Wendy’s or for the industry or market segments in which we operate. This could reduce demand for Wendy’s food and could result in a decrease in guest traffic to our restaurants as consumers shift their preferences to our competitors or to other products or food types. A decrease in guest traffic to our restaurants as a result of negative publicity from social media could result in a decline in sales and operating results at company-owned restaurants or in royalties from sales at franchised restaurants.

Growth of our restaurant businesses is dependent on new restaurant openings, which may be affected by factors beyond our control.

Our restaurant businesses derive earnings from sales at company-owned restaurants, franchise royalties received from franchised restaurants and franchise fees from franchise restaurant operators for each new unit opened. Growth in our restaurant revenues and earnings is dependent on new restaurant openings. Numerous factors beyond our control may affect restaurant openings. These factors include but are not limited to:

our ability to attract new franchisees;
the availability of site locations for new restaurants;
the ability of potential restaurant owners to obtain financing;
the ability of restaurant owners to hire, train and retain qualified operating personnel;
construction and development costs of new restaurants, particularly in highly-competitive markets;
the ability of restaurant owners to secure required governmental approvals and permits in a timely manner, or at all; and
adverse weather conditions.


13


Wendy’s franchisees could take actions that could harm our business.

Wendy’s franchisees are contractually obligated to operate their restaurants in accordance with the standards set forth in agreements with them. Wendy’s also provides training and support to franchisees. However, franchisees are independent third parties that we do not control, and the franchisees own, operate and oversee the daily operations of their restaurants. As a result, the ultimate success and quality of any franchise restaurant rests with the franchisee. If franchisees do not successfully operate restaurants in a manner consistent with required standards, royalty payments to us will be adversely affected and the brand’s image and reputation could be harmed, which in turn could hurt our business and operating results.

Our success depends on franchisees’ participation in brand strategies.

Wendy’s franchisees are an integral part of our business. Wendy’s may be unable to successfully implement the strategies that it believes are necessary for further growth if franchisees do not participate in that implementation. Our business and operating results could be adversely affected if a significant number of franchisees do not participate in brand strategies.

The Companys Image Activation program may not positively affect sales at company-owned and participating franchised restaurants or improve our results of operations.

Throughout 2013, the Company plans to reimage approximately 100 existing company-owned restaurants and open approximately 25 new company-owned restaurants under its Image Activation program, with plans for significantly more new and reimaged Company and franchisee restaurants in 2014 and beyond. The Company also expects that franchisees will reimage approximately 100 and build 40 new restaurants in 2013. Wendy’s initiated a cash incentive program for franchisees during the third quarter of 2012. In January 2013, the program was expanded to include variable cash incentives for Tier 1, 2, and 3 remodels and to allow for a maximum of $100,000 each, for up to three incentives per franchisee. The cash incentive program is for the reimaging of restaurants completed in 2013 and totals $10.0 million. The Company intends to use its cash on hand and operating cash flows to fund the Image Activation program and new restaurant growth.

The Company’s Image Activation program may not positively affect sales at company-owned restaurants or improve results of operations. There can be no assurance that sales at participating restaurants will achieve or maintain projected levels or that the Company’s results of operations will improve.

In addition, most of the Wendy’s system consists of franchised restaurants. Many of our franchisees will need to borrow funds in order to participate in the Image Activation program. Other than the cash incentive program described above, the Company generally does not provide franchisees with financing but it is actively developing third party financing sources for franchisees. If our franchisees are unable to obtain financing at commercially reasonable rates, or not at all, they may be unwilling or unable to invest in the reimaging of their existing restaurants and our future growth and results of operations could be adversely affected.

Further, it is possible that the Company or its subsidiaries may provide other financial incentives to franchisees to participate in the Image Activation program. These incentives could result in additional expense and/or a reduction of royalties or other revenues received from franchisees in the future. If the Company provides incentives to franchisees related to financing of the Image Activation program, the Company may incur costs related to loan guarantees, interest rate subsidies and/or costs related to collectability of loans.

Our financial results are affected by the operating results of franchisees.

As of December 30, 2012, approximately 78% of the Wendy’s system were franchise restaurants. We receive revenue in the form of royalties, which are generally based on a percentage of sales at franchised restaurants, rent and fees from franchisees. Accordingly, a substantial portion of our financial results is to a large extent dependent upon the operational and financial success of our franchisees. If sales trends or economic conditions worsen for franchisees, their financial results may worsen and our royalty, rent and other fee revenues may decline. In addition, accounts receivable and related allowance for doubtful accounts may increase. When company-owned restaurants are sold, one of our subsidiaries is often required to remain responsible for lease payments for these restaurants to the extent that the purchasing franchisees default on their leases. During periods of declining sales and profitability of franchisees, the incidence of franchisee defaults for these lease payments increases and we are then required to make those payments and seek recourse against the franchisee or agree to repayment terms. Additionally, if franchisees fail to renew their franchise agreements, or if we decide to restructure franchise agreements in order to induce franchisees to renew these agreements, then our royalty revenues may decrease. Further, we may decide from time to time to acquire restaurants from franchisees that experience significant financial hardship, which may reduce our cash and equivalents.


14


Wendy’s may be unable to manage effectively the acquisition and disposition of restaurants, which could adversely affect our business and financial results.

Wendy’s has from time to time acquired the interests of and sold Wendy’s restaurants to franchisees. Wendy’s intends to evaluate strategic acquisitions of franchised restaurants and strategic dispositions of company-owned restaurants to existing and new franchisees. The success of these transactions is dependent upon the availability of sellers and buyers, the availability of financing, and the brand’s ability to negotiate transactions on terms deemed acceptable. In addition, the operations of restaurants that the brand acquires may not be integrated successfully, and the intended benefits of such transactions may not be realized. Acquisitions of franchised restaurants pose various risks to brand operations, including:

diversion of management attention to the integration of acquired restaurant operations;
increased operating expenses and the inability to achieve expected cost savings and operating efficiencies;
exposure to liabilities arising out of sellers’ prior operations of acquired restaurants; and
incurrence or assumption of debt to finance acquisitions or improvements and/or the assumption of long-term, non-cancelable leases.

In addition, engaging in acquisitions and dispositions places increased demands on the brand’s operational and financial management resources and may require us to continue to expand these resources. If Wendy’s is unable to manage the acquisition and disposition of restaurants effectively, our business and financial results could be adversely affected.

Current restaurant locations may become unattractive, and attractive new locations may not be available for a reasonable price, if at all.
 
The success of any restaurant depends in substantial part on its location. There can be no assurance that our current restaurant locations will continue to be attractive as demographic patterns change. Neighborhood or economic conditions where our restaurants are located could decline in the future, thus resulting in potentially reduced sales in those locations. In addition, rising real estate prices in some areas may restrict our ability and the ability of franchisees to purchase or lease new desirable locations. If desirable locations cannot be obtained at reasonable prices, the brand’s ability to execute its growth strategies will be adversely affected.

Wendy’s leasing and ownership of significant amounts of real estate exposes it to possible liabilities and losses, including liabilities associated with environmental matters.
 
As of December 30, 2012, Wendy’s leased or owned the land and/or the building for 1,427 Wendy’s restaurants. Accordingly, we are subject to all of the risks associated with leasing and owning real estate. In particular, the value of our real property assets could decrease, and costs could increase, because of changes in the investment climate for real estate, demographic trends, supply or demand for the use of the restaurants, which may result from competition from similar restaurants in the area, and liability for environmental matters.

Wendy’s is subject to federal, state and local environmental, health and safety laws and regulations concerning the discharge, storage, handling, release and disposal of hazardous or toxic substances. These environmental laws provide for significant fines, penalties and liabilities, sometimes without regard to whether the owner, operator or occupant of the property knew of, or was responsible for, the release or presence of the hazardous or toxic substances. Third parties may also make claims against owners, operators or occupants of properties for personal injuries and property damage associated with releases of, or actual or alleged exposure to, such substances.  A number of our restaurant sites were formerly gas stations or are adjacent to current or former gas stations, or were used for other commercial activities that can create environmental impacts. We may also acquire or lease these types of sites in the future. We have not conducted a comprehensive environmental review of all of our properties. We may not have identified all of the potential environmental liabilities at our leased and owned properties, and any such liabilities identified in the future could cause us to incur significant costs, including costs associated with litigation, fines or clean-up responsibilities. In addition, we cannot predict what environmental legislation or regulations will be enacted in the future or how existing or future laws or regulations will be administered or interpreted. We cannot predict the amount of future expenditures that may be required in order to comply with any environmental laws or regulations or to satisfy any such claims. See “Item 1. Business - General - Environmental and Other Matters.”
 
Wendy’s leases real property generally for initial terms of 20 years with two to four additional options to extend the term of the leases in consecutive five-year increments. Many leases provide that the landlord may increase the rent over the term of the lease and any renewals thereof. Most leases require us to pay all of the costs of insurance, taxes, maintenance and utilities. We generally cannot cancel these leases. If an existing or future restaurant is not profitable, and we decide to close it, we may nonetheless

15


be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. In addition, as each lease expires, we may fail to negotiate additional renewals or renewal options, either on commercially acceptable terms or at all, which could cause us to close stores in desirable locations.

Due to the concentration of Wendy’s restaurants in particular geographic regions, our business results could be impacted by the adverse economic conditions prevailing in those regions regardless of the state of the national economy as a whole.

As of December 30, 2012, we and our franchisees operated Wendy’s restaurants in 50 states, the District of Columbia and 27 foreign countries and territories. As of December 30, 2012 and as detailed in “Item 2. Properties,” the 8 leading states by number of operating units were: Florida, Ohio, Texas, Georgia, Michigan, California, Pennsylvania and North Carolina. This geographic concentration can cause economic conditions in particular areas of the country to have a disproportionate impact on our overall results of operations. It is possible that adverse economic conditions in states or regions that contain a high concentration of Wendy’s restaurants could have a material adverse impact on our results of operations in the future.

Our operations are influenced by adverse weather conditions.

Weather, which is unpredictable, can impact Wendy’s restaurant sales. Harsh weather conditions that keep customers from dining out result in lost opportunities for our restaurants. A heavy snowstorm in the Northeast or Midwest or a hurricane in the Southeast can shut down an entire metropolitan area, resulting in a reduction in sales in that area. Our first quarter includes winter months and historically has a lower level of sales at company-owned restaurants. Because a significant portion of our restaurant operating costs is fixed or semi-fixed in nature, the loss of sales during these periods hurts our operating margins, and can result in restaurant operating losses. For these reasons, a quarter-to-quarter comparison may not be a good indication of Wendy’s performance or how it may perform in the future.

Wendy’s business could be hurt by increased labor costs or labor shortages.

Labor is a primary component in the cost of operating our company-owned restaurants. Wendy’s devotes significant resources to recruiting and training its managers and hourly employees. Increased labor costs due to competition, increased minimum wage or employee benefits costs (including government-mandated health care benefits) or other factors would adversely impact our cost of sales and operating expenses. In addition, Wendy’s success depends on its ability to attract, motivate and retain qualified employees, including restaurant managers and staff. If the brand is unable to do so, our results of operations could be adversely affected.

The Company, through a subsidiary, could become obligated to pay additional contributions due to the unfunded vested benefits of a multiemployer pension plan.  A future incurrence of withdrawal liability could have a material effect on the Company’s results of operations.
 
The unionized employees at The New Bakery Co. of Ohio, Inc. (the “Bakery”), a 100% owned subsidiary of Wendy’s, are covered by the Bakery and Confectionery Union and Industry International Pension Fund (the “Union Pension Fund”), a multiemployer pension plan with a plan year end of December 31 that provides defined benefits to certain employees covered by a collective bargaining agreement (the “CBA”).  In 2010, the terms of a new collective bargaining agreement (the “New CBA”) which expires on March 31, 2013, 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.
 
The future cost of the Union Pension Fund depends on a number of factors, including the funding status of the plan and the ability of other participating companies to meet ongoing funding obligations. Participating employers in the Union Pension Fund are jointly responsible for any plan underfunding.  Assets contributed to the Union Pension Fund are not segregated or otherwise restricted to provide benefits only to the employees of the Bakery.  While Wendy’s pension cost for the Union Pension Fund is established by the New CBA, the Union Pension Fund may impose increased contribution rates and surcharges based on the funded status of the plan and in accordance with the provisions of the Pension Protection Act of 2006 (the “PPA”), which requires underfunded multiemployer pension plans to implement rehabilitation plans to improve funded status.  Factors that could impact the funded status of the Union Pension Fund include investment performance, changes in the participant demographics, financial stability of contributing employers and changes in actuarial assumptions.  As of January 1, 2012, the Union Pension Fund was in Green Zone Status, as defined in the PPA and had been operating under a Rehabilitation Plan.
 
In April 2012, Wendy’s received a Notice of Critical Status from the Union Pension Fund which sets forth that the plan was considered to be in Red Zone Status, as defined in the PPA, for the 2012 plan year due to funding problems.  As the fund is in

16


critical status, all contributing employers, including Wendy’s, will be required to pay a 5% surcharge on contributions for all hours worked from June 1, 2012 through December 30, 2012 and a 10% surcharge on contributions for all hours worked on and after January 1, 2013 until a contribution rate is negotiated at the expiration of the New CBA that will be consistent with a revised Rehabilitation Plan which must be adopted by the Union Pension Fund in accordance with the provisions of the PPA.  
 
The surcharges and the possible effect of the revised Rehabilitation Plan to be adopted by the Union Pension Fund as described above are not anticipated to have a material effect on the Company's results of operations. However, in the event other contributing employers are unable to, or fail to, meet their ongoing funding obligations, the financial impact on the Company to contribute to any plan underfunding may be material.
   
Wendy’s could also be obligated to pay additional contributions (known as complete or partial withdrawal liabilities) due to the unfunded vested benefits of the Union Pension Fund.  The withdrawal liability (which could be material) would equal Wendy’s proportionate share of the unfunded vested benefits based on the year in which the liability is triggered.  A withdrawal liability would be triggered if Wendy’s (1) ceases to make contributions to the Union Pension Fund, (2) closes its bakery facility, or (3) decides not to renew the collective bargaining agreement.  No factors for which the Bakery would incur a withdrawal liability occurred during fiscal 2012.  A future incurrence of withdrawal liability could have a material effect on the Company’s results of operations.

Complaints or litigation may hurt the Wendy’s brand.

Wendy’s customers file complaints or lawsuits against us alleging that we are responsible for an illness or injury they suffered at or after a visit to a Wendy’s restaurant, or alleging that there was a problem with food quality or operations at a Wendy’s restaurant. We are also subject to a variety of other claims arising in the ordinary course of our business, including personal injury claims, contract claims, claims from franchisees (which tend to increase when franchisees experience declining sales and profitability) and claims alleging violations of federal and state law regarding workplace and employment matters, discrimination and similar matters, including class action lawsuits related to these matters. Regardless of whether any claims against us are valid or whether we are found to be liable, claims may be expensive to defend and may divert management’s attention away from operations and hurt our performance. We cannot estimate the aggregate possible range of loss due to most proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur, and significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral decisions are thus inherently difficult. A judgment significantly in excess of our insurance coverage for any claims could materially adversely affect our financial condition or results of operations. Further, adverse publicity resulting from these claims may hurt us and our franchisees.

Additionally, the restaurant industry has been subject to a number of claims that the menus and actions of restaurant chains have led to the obesity of certain of their customers. Adverse publicity resulting from these allegations may harm the reputation of our restaurants, even if the allegations are not directed against our restaurants or are not valid, and even if we are not found liable or the concerns relate only to a single restaurant or a limited number of restaurants. Moreover, complaints, litigation or adverse publicity experienced by one or more of Wendy’s franchisees could also hurt our business as a whole.

We may not be able to adequately protect our intellectual property, which could harm the value of the Wendy’s brand and hurt our business.

Our intellectual property is material to the conduct of our business. We rely on a combination of trademarks, copyrights, service marks, trade secrets and similar intellectual property rights to protect our brand and other intellectual property. The success of our business strategy depends, in part, on our continued ability to use our existing trademarks and service marks in order to increase brand awareness and further develop our branded products in both existing and new markets. If our efforts to protect our intellectual property are not adequate, or if any third party misappropriates or infringes on our intellectual property, either in print or on the Internet, the value of our brand may be harmed, which could have a material adverse effect on our business, including the failure of our brand to achieve and maintain market acceptance. This could harm our image, brand or competitive position and, if we commence litigation to enforce our rights, cause us to incur significant legal fees.

We franchise our brand to various franchisees. While we try to ensure that the quality of our brand is maintained by all of our franchisees, we cannot assure you that these franchisees will not take actions that hurt the value of our intellectual property or the reputation of the Wendy’s restaurant system.

We have registered certain trademarks and have other trademark registrations pending in the United States and certain foreign jurisdictions. The trademarks that we currently use have not been registered in all of the countries outside of the United States in

17


which we do business or may do business in the future and may never be registered in all of these countries. We cannot assure you that all of the steps we have taken to protect our intellectual property in the United States and foreign countries will be adequate. The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States.
 
In addition, we cannot assure you that third parties will not claim infringement by us in the future. Any such claim, whether or not it has merit, could be time-consuming, result in costly litigation, cause delays in introducing new menu items, require costly modifications to advertising and promotional materials or require us to enter into royalty or licensing agreements. As a result, any such claim could harm our business and cause a decline in our results of operations and financial condition.

Our current insurance may not provide adequate levels of coverage against claims that may be filed.

We currently maintain insurance we believe is adequate for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure, such as losses due to natural disasters or acts of terrorism. In addition, we currently self-insure a significant portion of expected losses under workers compensation, general liability and property insurance programs. Unanticipated changes in the actuarial assumptions and management estimates underlying our reserves for these losses could result in materially different amounts of expense under these programs, which could harm our business and adversely affect our results of operations and financial condition.

Changes in legal or regulatory requirements, including franchising laws, payment card industry rules, overtime rules, minimum wage rates, government-mandated health care benefits, tax legislation, federal ethanol policy and accounting standards, may hurt our ability to open new restaurants or otherwise hurt our existing and future operations and results.

Each Wendy’s restaurant is subject to licensing and regulation by health, sanitation, safety and other agencies in the state and/or municipality in which the restaurant is located, as well as to Federal laws, rules and regulations and requirements of non-governmental entities such as payment card industry rules. State and local government authorities may enact laws, rules or regulations that impact restaurant operations and the cost of conducting those operations. There can be no assurance that we and/or our franchisees will not experience material difficulties or failures in obtaining the necessary licenses or approvals for new restaurants, which could delay the opening of such restaurants in the future. In addition, more stringent and varied requirements of local governmental bodies with respect to tax, zoning, land use and environmental factors could delay or prevent development of new restaurants in particular locations.

Federal laws, rules and regulations address many aspects of our business, such as franchising, federal ethanol policy, minimum wages and taxes. We and our franchisees are also subject to the Fair Labor Standards Act, which governs such matters as minimum wages, overtime and other working conditions, along with the ADA, family leave mandates and a variety of other laws enacted by the states that govern these and other employment law matters.

Changes in accounting standards, or in the interpretation of existing standards, applicable to us could also affect our future results.

Changes in government-mandated health care benefits under the Patient Protection and Affordable Care Act (“PPACA”) are also anticipated to increase our costs and the costs of our franchisees. Our compliance with the PPACA may result in significant modifications to our employment and benefits policies and practices.  Because of the absence of final implementing regulations, we currently cannot predict the timing or amount of those cost increases or modifications to our business practices. However, the cost increases may be material and such modifications to our business practices may be disruptive to our operations and impact our ability to attract and retain personnel.

Wendy’s does not exercise ultimate control over purchasing for its restaurant system, which could harm sales or profitability and the brand.

Although Wendy’s ensures that all suppliers to the Wendy’s system meet quality control standards, Wendy’s franchisees control the purchasing of food, proprietary paper, equipment and other operating supplies from such suppliers through the purchasing co-op controlled by Wendy’s franchisees, QSCC. QSCC negotiates national contracts for such food, equipment and supplies. Wendy’s is entitled to appoint two representatives (of the total of 11) on the board of directors of QSCC and participates in QSCC through its company-owned restaurants, but does not control the decisions and activities of QSCC except to ensure that all suppliers satisfy Wendy’s quality control standards. If QSCC does not properly estimate the product needs of the Wendy’s system, makes poor purchasing decisions, or decides to cease its operations, system sales and operating costs could be adversely affected and our results of operations and financial condition or the financial condition of Wendy’s franchisees could be hurt.


18


Our international operations are subject to various factors of uncertainty and there is no assurance that international operations will be profitable.
In addition to many of the risk factors described throughout this Item 1A, Wendy’s business outside of the United States is subject to a number of additional factors, including international economic and political conditions, risk of corruption and violations of the United States Foreign Corrupt Practices Act or similar laws of other countries, differing cultures and consumer preferences, the inability to adapt to international customer preferences, inadequate brand infrastructure within foreign countries to support our international activities, inability to obtain adequate supplies meeting our quality standards and product specifications or interruptions in obtaining such supplies, currency regulations and fluctuations, diverse government regulations and tax systems, uncertain or differing interpretations of rights and obligations in connection with international franchise agreements and the collection of royalties from international franchisees, the availability and cost of land, construction costs, other legal, financial or regulatory impediments to the development and/or operation of new restaurants, and the availability of experienced management, appropriate franchisees, and joint venture partners. Although we believe we have developed the support structure required for international growth, there is no assurance that such growth will occur or that international operations will be profitable.
To the extent we invest in international company-operated restaurants or joint ventures, we would also have the risk of operating losses related to those restaurants, which would adversely affect our results of operations and financial condition.
We rely on computer systems and information technology to run our business. Any material failure, interruption or security breach of our computer systems or information technology may result in adverse publicity and adversely affect the operation of our business and results of operations.
We are significantly dependent upon our computer systems and information technology to properly conduct our business. A failure or interruption of computer systems or information technology could result in the loss of data, business interruptions or delays in business operations. Also, despite our considerable efforts and technological resources to secure our computer systems and information technology, security breaches, such as unauthorized access and computer viruses, may occur resulting in system disruptions, shutdowns or unauthorized disclosure of confidential information. A significant security breach of our computer systems or information technology could require us to notify customers, employees or other groups, result in adverse publicity, loss of sales and profits, and incur penalties or other costs that could adversely affect the operation of our business and results of operations.

Failure to comply with laws, regulations and third party contracts regarding the collection, maintenance and processing of information may result in adverse publicity and adversely affect the operation of our business and results of operations.

We collect, maintain and process certain information about customers and employees. Our use and protection of this information is regulated by various laws and regulations, as well as by third party contracts. If our systems or employees fail to comply with these laws, regulations or contract terms, it could require us to notify customers, employees or other groups, result in adverse publicity, loss of sales and profits, increase fees payable to third parties, and incur penalties or remediation and other costs that could adversely affect the operation of our business and results of operations.

We may be required to recognize additional asset impairment and other asset-related charges.

We have significant amounts of long-lived assets, goodwill and intangible assets and have incurred impairment charges in the past with respect to those assets. In accordance with applicable accounting standards, we test for impairment generally annually, or more frequently, if there are indicators of impairment, such as:

significant adverse changes in the business climate;
current period operating or cash flow losses combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with long-lived assets;
a current expectation that more-likely-than-not (e.g., a likelihood that is more than 50%) long-lived assets will be sold or otherwise disposed of significantly before the end of their previously estimated useful life; and
a significant drop in our stock price.

Based upon future economic and capital market conditions, as well as the operating performance of our reporting units, future impairment charges could be incurred.


19


We enter into swaps and other derivative contracts, which expose us to potential losses in the event of nonperformance by counterparties.

We have entered into interest rate swaps and other derivative contracts as described in Note 13 of the Financial Statements and Supplementary Data included in Item 8 herein, and we may enter into additional swaps in the future. We are exposed to potential losses in the event of nonperformance by counterparties on these instruments, which could adversely affect our results of operations, financial condition and liquidity.

Wendys and its subsidiaries are subject to various restrictions, and substantially all of their non-real estate assets are pledged and subject to certain restrictions, under a Credit Agreement.

In May 2012, Wendy’s entered into a Credit Agreement, as amended (the “Credit Agreement”), which includes a senior secured term loan facility of $1,125.0 million and a senior secured revolving credit facility of $200.0 million.  The Credit Agreement also contains provisions for an uncommitted increase of up to $275.0 million principal amount of the revolving credit facility and/or term loan subject to the satisfaction of certain conditions. The revolving credit facility includes a sub-facility for the issuance of up to $70.0 million of letters of credit. The obligations under the Credit Agreement are secured by substantially all of the non-real estate assets of Wendy’s and its domestic subsidiaries (other than certain unrestricted subsidiaries), the stock of its domestic subsidiaries (other than certain unrestricted subsidiaries), and 65% of the stock of certain of its foreign subsidiaries, in each case subject to certain limitations and exceptions. 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, and (ii) a consolidated senior secured leverage ratio. For purposes of these covenants, “consolidated” means the combined results of Wendy’s and its subsidiaries (other than unrestricted subsidiaries). The covenants generally do not restrict The Wendy’s Company or any of its subsidiaries that are not subsidiaries of Wendy’s.  If Wendy’s and its subsidiaries are unable to generate sufficient cash flow or otherwise obtain the funds necessary to make required payments of interest or principal under, or are unable to comply with covenants of, the Credit Agreement, then Wendy’s would be in default under the terms of the agreement, which would preclude the payment of dividends to The Wendy’s Company, restrict access to the revolving credit facility, and, under certain circumstances, permit the lenders to accelerate the maturity of the indebtedness. See Note 12 of the Financial Statements and Supplementary Data included in Item 8 herein, for further information regarding the Credit Agreement.

Wendys has a significant amount of debt outstanding. Such indebtedness, along with the other contractual commitments of our subsidiaries, could adversely affect our business, financial condition and results of operations, as well as the ability of certain of our subsidiaries to meet debt payment obligations.

Wendy’s has a significant amount of debt and debt service requirements. As of December 30, 2012, on a consolidated basis, there was approximately $1.5 billion of outstanding debt.

This level of debt could have significant consequences on our future operations, including:

making it more difficult to meet payment and other obligations under outstanding debt;
resulting in an event of default if our subsidiaries fail to comply with the financial and other restrictive covenants contained in debt agreements, which event of default could result in all of our subsidiaries’ debt becoming immediately due and payable;
reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes;
subjecting us to the risk of increased sensitivity to interest rate increases on our indebtedness with variable interest rates, including borrowings under the Credit Agreement;
limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industry in which we operate and the general economy; and
placing us at a competitive disadvantage compared to our competitors that are less leveraged.
 
In addition, certain of our subsidiaries also have significant contractual requirements for the purchase of soft drinks. Wendy’s has also provided loan guarantees to various lenders on behalf of franchisees entering into pooled debt facility arrangements for

20


new store development and equipment financing, and one guarantee to a lender for a franchisee, in connection with the refinancing of the franchisee’s debt. Certain subsidiaries also guarantee or are contingently liable for certain leases of their respective franchisees for which they have been indemnified. In addition, certain subsidiaries also guarantee or are contingently liable for certain leases of their respective franchisees for which they have not been indemnified. These commitments could have an adverse effect on our liquidity and the ability of our subsidiaries to meet payment obligations.

The ability to meet payment and other obligations under the debt instruments of our subsidiaries depends on their ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, or that future borrowings will be available to us under existing or any future credit facilities or otherwise, in an amount sufficient to enable our subsidiaries to meet their debt payment obligations and to fund other liquidity needs. If our subsidiaries are not able to generate sufficient cash flow to service their debt obligations, they may need to refinance or restructure debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. If our subsidiaries are unable to implement one or more of these alternatives, they may not be able to meet debt payment and other obligations.

We and our subsidiaries may still be able to incur substantially more debt. This could exacerbate further the risks associated with our substantial leverage.

We and our subsidiaries may be able to incur substantial additional indebtedness, including additional secured indebtedness, in the future. The terms of the Credit Agreement restrict, but do not completely prohibit, us or our subsidiaries from doing so. If new debt or other liabilities are added to our current consolidated debt levels, the related risks that we now face could intensify.

To service debt and meet its other cash needs, Wendy’s will require a significant amount of cash, which may not be generated or available to it.

The ability of Wendy’s to make payments on, or repay or refinance, its debt, including the Credit Agreement, and to fund planned capital expenditures, dividends and other cash needs will depend largely upon its future operating performance. Future performance, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. In addition, the ability of Wendy’s to borrow funds in the future to make payments on its debt will depend on the satisfaction of the covenants in its credit facilities and other debt agreements, including the Credit Agreement and other agreements it may enter into in the future. Specifically, Wendy’s will need to maintain specified financial ratios and satisfy financial condition tests. There is no assurance that the Wendy’s business will generate sufficient cash flow from operations or that future borrowings will be available under its credit facilities or from other sources in an amount sufficient to enable it to pay its debt or to fund its or The Wendy’s Company’s dividend and other liquidity needs.

As a result of the indemnification provisions of the Purchase and Sale Agreement pursuant to which the sale of Arby’s occurred on July 4, 2011, Wendy’s Restaurants may incur expenses and liabilities for taxes related to periods up to the date of sale.

As a result of the indemnification provisions of the Purchase and Sale Agreement pursuant to which the sale of Arby’s occurred on July 4, 2011, Wendy’s Restaurants may incur expenses and liabilities for taxes related to periods up to the date of sale, such as income, sales and use, and other operating taxes. As of December 30, 2012, Wendy’s Restaurants had accrued $1.3 million for certain tax liabilities related to Arby’s which are the obligations of Wendy’s Restaurants pursuant to the indemnification provisions of the Purchase and Sale Agreement and it is possible that further accruals may occur in future periods as audits by various taxing authorities are resolved. Further accruals in future periods would adversely affect our results of operations

There can be no assurance regarding whether or to what extent the Company will pay dividends on its Common Stock in the future.

Holders of the Company’s Common Stock will only be entitled to receive such dividends as its Board of Directors may declare out of funds legally available for such payments. Any dividends will be made at the discretion of the Board of Directors and will depend on the Company’s earnings, financial condition, cash requirements and such other factors as the Board of Directors may deem relevant from time to time.

Because the Company is a holding company, its ability to declare and pay dividends is dependent upon cash, cash equivalents and short-term investments on hand and cash flows from its subsidiaries. The ability of its subsidiaries to pay cash dividends and/or make loans or advances to the holding company will be dependent upon their respective abilities to achieve sufficient cash flows after satisfying their respective cash requirements, including subsidiary-level debt service and revolving credit agreements,

21


to enable the payment of such dividends or the making of such loans or advances. The ability of any of its subsidiaries to pay cash dividends or other payments to the Company will also be limited by restrictions in debt instruments currently existing or subsequently entered into by such subsidiaries, including the Credit Agreement, which is described earlier in this Item 1A.

A substantial amount of the Companys Common Stock is concentrated in the hands of certain stockholders.

Nelson Peltz, the Company’s Chairman and former Chief Executive Officer, and Peter May, the Company’s Vice Chairman and former President and Chief Operating Officer, beneficially own shares of the Company’s outstanding Common Stock that collectively constitute more than 25% of its total voting power. Messrs. Peltz and May may, from time to time, acquire beneficial ownership of additional shares of Common Stock.

On December 1, 2011, the Company entered into an agreement (the “Trian Agreement”) with Messrs. Peltz and May and several of their affiliates (the “Covered Persons”). Pursuant to the Trian Agreement, the Board of Directors (the “Board”), including a majority of the independent directors, approved, for purposes of Section 203 of the Delaware General Corporation Law (“Section 203”), the Covered Persons becoming the owners (as defined in Section 203(c)(9) of the DGCL) of or acquiring an aggregate of up to (and including), but not more than, 32.5% (subject to certain adjustments set forth in the Agreement, the “Maximum Percentage”) of the outstanding shares of the Company’s Common Stock, such that no such persons would be subject to the restrictions set forth in Section 203 solely as a result of such ownership (such approval, the “Section 203 Approval”).

Pursuant to the Trian Agreement, each of the Covered Persons has agreed that, for so long as the Company has a class of equity securities listed on any national securities exchange, (i) he will not purchase or cause to be purchased, or otherwise acquire, beneficial ownership of Company voting securities that would increase the aggregate beneficial ownership of Company voting securities by the Covered Persons above the Maximum Percentage; (ii) he will not solicit proxies or submit any proposal for the vote of stockholders of the Company or recommend or request or induce any other person to take any such actions or seek to advise, encourage or influence any other person with respect to the Shares, in each case, if the result of such action would be to cause the Board to be comprised of less than a majority of independent directors; (iii) he will not engage in certain affiliate transactions with the Company without the prior approval of a majority of the Audit Committee of the Board or other committee of the Board that is comprised of independent directors; and (iv) except with respect to certain pledged shares, each of the Covered Persons shall cause the Company voting securities owned by it to be present at stockholder meetings for the purposes of establishing a quorum and shall vote any Company voting securities in excess of the shares beneficially owned by them on the date of the Trian Agreement either as recommended by the Board or in the same proportion as Company voting securities not owned by the Covered Persons are actually voted, subject to certain limited exceptions.

The Trian Agreement (other than the provisions relating to the Section 203 Approval and certain miscellaneous provisions that survive the termination of the Agreement) will terminate upon the earliest to occur of (i) the Covered Persons ceasing to own in the aggregate 25% of the outstanding voting power of the Company, (ii) December 1, 2014, (iii) at such time as the Company’s Common Stock is no longer listed on a national securities exchange, and (iv) such time as any person other than the Covered Persons or any Affiliate, Associate of, or member of a Schedule 13D group with, the Covered Persons, (a) makes an offer to purchase (x) an amount of shares that when added to the number of shares already beneficially owned by such person and its affiliates and associates equals or exceeds 50% of the outstanding voting power of the Company or (y) all or substantially all of the assets of the Company, (b) solicits proxies with respect to a majority slate of directors or (c) commences or announces an intention to commence a solicitation of proxies, becomes a “participant” in a “solicitation” or assists any “participant” in, a “solicitation” (as such terms are defined in Rule 14a-1 of Regulation 14A under the Securities Exchange Act of 1934, as amended), or submits any proposal for the vote of stockholders of the Company, or recommends or requests or induces or attempts to induce any other person to take any such actions, or to seek to advise, encourage or influence any other person with respect to the voting of Company voting securities, in each case, if the result of any such proposal or solicitation would be to change a majority of the persons serving as directors on the Board.

This concentration of ownership gives Messrs. Peltz and May significant influence over the outcome of actions requiring stockholder approval, including the election of directors and the approval of mergers, consolidations and the sale of all or substantially all of the Company’s assets. They are also in a position to have significant influence to prevent or cause a change in control of the Company. If in the future Messrs. Peltz and May were to acquire more than a majority of the Company’s outstanding voting power, they would be able to determine the outcome of the election of members of the Board of Directors and the outcome of corporate actions requiring majority stockholder approval, including mergers, consolidations and the sale of all or substantially all of the Company’s assets. They would also be in a position to prevent or cause a change in control of the Company.


22


The Company’s certificate of incorporation contains certain anti-takeover provisions and permits our Board of Directors to issue preferred stock without stockholder approval and limits its ability to raise capital from affiliates.

Certain provisions in the Company’s certificate of incorporation are intended to discourage or delay a hostile takeover of control of the Company. The Company’s certificate of incorporation authorizes the issuance of shares of “blank check” preferred stock, which will have such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power and other rights of the holders of its common stock. The preferred stock could be used to discourage, delay or prevent a change in control of the Company that is determined by the Board of Directors to be undesirable. Although the Company has no present intention to issue any shares of preferred stock, it cannot assure you that it will not do so in the future.

The Company’s certificate of incorporation prohibits the issuance of preferred stock to affiliates, unless offered ratably to the holders of the Company’s Common Stock, subject to an exception in the event that the Company is in financial distress and the issuance is approved by its audit committee. This prohibition limits the ability to raise capital from affiliates.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

We believe that our properties, taken as a whole, are generally well maintained and are adequate for our current and foreseeable business needs.

The following table contains information about our principal office facilities as of December 30, 2012:
ACTIVE FACILITIES
 
FACILITIES-LOCATION
 
LAND TITLE
 
APPROXIMATE SQ. FT. OF FLOOR SPACE
Corporate Headquarters
 
Dublin, Ohio
 
Owned
 
324,025

*
Wendy’s Restaurants of Canada Inc.
 
Oakville, Ontario, Canada
 
Leased
 
35,125

 
_____________________

*
QSCC, the independent Wendy’s purchasing cooperative in which Wendy’s has non-controlling representation on the board of directors, leases 14,333 square feet of this space from Wendy’s.
At December 30, 2012, Wendy’s and its franchisees operated 6,560 Wendy’s restaurants. Of the 1,427 company-owned Wendy’s restaurants, Wendy’s owned the land and building for 631 restaurants, owned the building and held long-term land leases for 515 restaurants and held leases covering land and building for 281 restaurants. Wendy’s land and building leases are generally written for terms of 10 to 25 years with one or more five-year renewal options. In certain lease agreements Wendy’s has the option to purchase the real estate. Certain leases require the payment of additional rent equal to a percentage, generally less than 6%, of annual sales in excess of specified amounts. As of December 30, 2012, Wendy’s also owned 67 and leased 203 properties that were either leased or subleased principally to franchisees. Surplus land and buildings are generally held for sale and are not material to our financial condition or results of operations.

The Bakery operates two facilities in Zanesville, Ohio that produce buns for Wendy’s restaurants and other outside parties. The buns are distributed to both company-owned and franchised restaurants primarily using the Bakery’s fleet of trucks. As of December 30, 2012, the Bakery employed approximately 350 people at the two facilities that had a combined size of approximately 205,000 square feet.



23


The location of company-owned and franchised restaurants as of December 30, 2012 is set forth below.
 
 
Wendy’s
State
 
Company
 
Franchise
Alabama
 

 
96

Alaska
 

 
7

Arizona
 
43

 
55

Arkansas
 

 
64

California
 
51

 
208

Colorado
 
46

 
80

Connecticut
 
5

 
45

Delaware
 

 
15

Florida
 
182

 
302

Georgia
 
51

 
238

Hawaii
 
8

 

Idaho
 

 
29

Illinois
 
101

 
93

Indiana
 
5

 
174

Iowa
 

 
44

Kansas
 
10

 
62

Kentucky
 
3

 
137

Louisiana
 
58

 
71

Maine
 

 
20

Maryland
 

 
112

Massachusetts
 
80

 
13

Michigan
 
20

 
248

Minnesota
 

 
68

Mississippi
 

 
95

Missouri
 
39

 
57

Montana
 

 
16

Nebraska
 

 
33

Nevada
 

 
45

New Hampshire
 
4

 
21

New Jersey
 
14

 
125

New Mexico
 
24

 
13

New York
 
63

 
153

North Carolina
 
39

 
213

North Dakota
 

 
9

Ohio
 
74

 
347

Oklahoma
 

 
39

Oregon
 
18

 
31

Pennsylvania
 
79

 
179

Rhode Island
 
9

 
8

South Carolina
 

 
132

South Dakota
 

 
9

Tennessee
 

 
184

Texas
 
104

 
275

Utah
 
54

 
31

Vermont
 

 
4

Virginia
 
54

 
160

Washington
 
30

 
43

West Virginia
 
21

 
51

Wisconsin
 

 
57

Wyoming
 

 
14

District of Columbia
 

 
3

Domestic subtotal
 
1,289

 
4,528

Canada
 
138

 
231

North America subtotal
 
1,427

 
4,759


24


 
 
Wendy’s
 
Country/Territory
 
Company
 
Franchise
 
Argentina
 

 
1

 
Aruba
 

 
4

 
Bahamas
 

 
11

 
Costa Rica
 

 
13

 
Curacao
 

 
1

 
Dominican Republic
 

 
8

 
El Salvador
 

 
14

 
Grand Cayman Islands
 

 
2

 
Guam
 

 
4

 
Guatemala
 

 
9

 
Honduras
 

 
35

 
Indonesia
 

 
25

 
Jamaica
 

 
4

 
Japan
 

 
2

(a)
Malaysia
 

 
10

 
Mexico
 

 
25

 
New Zealand
 

 
18

 
Panama
 

 
7

 
Philippines
 

 
32

 
Puerto Rico
 

 
76

 
Russian Federation
 

 
8

 
Singapore
 

 
11

 
Trinidad and Tobago
 

 
3

 
United Arab Emirates
 

 
13

 
Venezuela
 

 
36

 
U. S. Virgin Islands
 

 
2

 
International subtotal
 

 
374

 
Grand total
 
1,427

 
5,133

 
________________

(a)
Wendy’s is a 49% partner in a joint venture for the operation of Wendy’s restaurants in Japan.

Item 3.  Legal Proceedings.

We are involved in litigation and claims incidental to our current and prior businesses.  We provide reserves for such litigation and claims when payment is probable and reasonably estimable. The Company believes it has adequate reserves for continuing operations for all of its legal and environmental matters. We cannot estimate the aggregate possible range of loss due to most proceedings being in preliminary stages, with various motions either yet to be submitted or pending, discovery yet to occur, and significant factual matters unresolved. In addition, most cases seek an indeterminate amount of damages and many involve multiple parties. Predicting the outcomes of settlement discussions or judicial or arbitral decisions is thus inherently difficult. Based on our 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 effect on our consolidated financial position or results of operations.

Wendy’s completed the initial public offering of Tim Hortons Inc. (“THI”) in March, 2006 and the spin-off of THI in September, 2006. In connection with the initial public offering, Wendy’s and THI entered into a tax sharing agreement that governed the rights and responsibilities of the parties with respect to taxes for periods up to the date of the spin-off, including the allocation of tax attributes between the parties. In 2007, Wendy’s asserted a claim against THI for approximately $1.0 million for a tax claim related to a competent authority adjustment. THI has disputed this claim. In addition, THI has asserted claims for damages related to foreign tax credits THI allegedly should have received in the spin-off in the aggregate amount of C$29.0 million. Wendy’s has disputed and continues to dispute these claims. In 2011, THI invoked the dispute resolution provision of the tax sharing agreement, which calls for binding mandatory arbitration. In February, 2012, THI submitted a notice of claim, which makes the same claims THI has asserted under the tax sharing agreement, to Wendy’s under the master separation agreement between Wendy’s and THI that was executed contemporaneously with the tax sharing agreement. The dispute resolution provision of the master separation agreement calls for good faith negotiations between the parties, followed by non-binding mediation. Either party can bring suit if no resolution is reached following mediation. The parties are still in discussions but it no longer appears likely that a resolution

25


will be reached without the involvement of a neutral third party. The parties have agreed on a mediator and a mediation date. We cannot estimate a range of possible loss, if any, for this matter at this time since, among other things, it is still in a preliminary stage, significant factual and legal issues are unresolved, no mediation sessions have been held, and the mediation will be non-binding.  If no agreed resolution is reached, the matter would be resolved either by litigation or binding mandatory arbitration, in which case various motions would be submitted and discovery would occur.  If no agreed resolution is reached, Wendy’s intends to vigorously assert its claim and defend against the THI claims.

Item 4.  Mine Safety Disclosures.

Not applicable.

26


PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

In December 2011, The Wendy’s Company transferred the listing of its common stock from the New York Stock Exchange (symbol:WEN) to NASDAQ Global Select Market (“NASDAQ”). The Company’s common stock continues to trade under the symbol “WEN.” The high and low market prices for The Wendy’s Company common stock are set forth below:

 
Market Price
Fiscal Quarters
Common Stock
 
High
 
Low
2012
 
 
 
First Quarter ended April 1
$
5.50

 
$
4.67

Second Quarter ended July 1
5.09

 
4.37

Third Quarter ended September 30
4.80

 
4.16

Fourth Quarter ended December 30
4.87

 
4.09

 
 
 
 
2011
 
 
 
First Quarter ended April 3
$
5.22

 
$
4.40

Second Quarter ended July 3
5.20

 
4.50

Third Quarter ended October 2
5.62

 
4.36

Fourth Quarter ended January 1
5.58

 
4.29


The Wendy’s Company common stock is entitled to one vote per share on all matters on which stockholders are entitled to vote. The Wendy’s Company has no class of equity securities currently issued and outstanding except for its common stock. However, it is currently authorized to issue up to 100 million shares of preferred stock.
    
For the first three quarters of the 2012 fiscal year and during the 2011 fiscal year, The Wendy’s Company paid quarterly cash dividends of $0.02 per share on its common stock. The fourth quarter 2012 cash dividend was $0.04 per share of common stock.

During the 2013 first quarter, The Wendy’s Company declared a dividend of $0.04 per share to be paid on March 15, 2013 to shareholders of record as of March 1, 2013. Although The Wendy’s Company currently intends to continue to declare and pay quarterly cash dividends, there can be no assurance that any additional quarterly cash dividends will be declared or paid or the amount or timing of such dividends, if any. Any future dividends will be made at the discretion of our Board of Directors and will be based on such factors as The Wendy’s Company earnings, financial condition, cash requirements and other factors.

As of February 22, 2013, there were approximately 39,494 holders of record of The Wendy’s Company common stock.


27


The following table provides information with respect to repurchases of shares of our common stock by us and our “affiliated purchasers” (as defined in Rule 10b-18(a)(3) under the Exchange Act) during the fourth fiscal quarter of 2012:

Issuer Repurchases of Equity Securities

Period
Total Number of Shares Purchased (1)
Average
Price Paid
per Share
Total Number of
Shares Purchased
as Part of
Publicly Announced
Plan
Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Plan (2)
October 1, 2012
through
November 4, 2012




November 5, 2012
through
December 2, 2012
194,604

$4.62

$
100,000,000

December 3, 2012
through
December 30, 2012
99,672

$4.74

$
100,000,000

Total
294,276

$4.66

$
100,000,000


(1) All shares were reacquired by The Wendy’s Company from holders of share-based awards to satisfy certain requirements associated with the vesting or exercise of the respective award. The shares were valued at the average of the high and low trading prices of our common stock on the vesting or exercise date of such awards.

(2) In November 2012, our Board of Directors authorized the repurchase of up to $100.0 million of our common stock through December 29, 2013, when and if market conditions warrant and to the extent legally permissible.




28


Item 6. Selected Financial Data.

 
Year Ended (1) (2)
 
 
December 30, 2012
 
January 1, 2012
 
January 2, 2011
 
January 3,
2010
 
December 28,
2008 (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
(In Millions, except per share amounts)
 
Sales
$
2,198.3

 
$
2,126.6

 
$
2,079.1

 
$
2,134.2

 
$
530.8

 
Franchise revenues
306.9

 
304.8

 
296.3

 
302.9

 
74.6

 
Revenues
2,505.2

 
2,431.4

 
2,375.4

 
2,437.1

 
605.4

 
Operating profit (loss)
122.7

(7)
137.1

(8)
150.4

(9)
97.6

(10)
(32.4
)
 
Income (loss) from continuing
     operations
8.0

(7)
17.9

(8)
18.1

(9)
5.4

(10)
(128.1
)
(11)
Income (loss) from discontinued
     operations (4)
1.5

 
(8.0
)
 
(22.4
)
 
(0.3
)
 
(351.6
)
 
Net income (loss)
7.1

(7)
9.9

(8)
(4.3
)
(9)
5.1

(10)
(479.7
)
(11)
Basic and diluted income (loss)
     per share (5):
 
 
 
 
 
 
 
 
 
 
Continuing operations:
 
 
 
 
 
 
 
 
 
 
Common stock
.02

 
.04

 
.04

 
.01

 
(.81
)
 
Class B common stock
N/A

 
N/A

 
N/A

 
N/A

 
(.33
)
 
Discontinued operations:
 
 
 
 
 
 
 
 
 
 
Common stock

 
(.02
)
 
(.05
)
 

 
(2.24
)
 
Class B common stock
N/A

 
N/A

 
N/A

 
N/A

 
(.91
)
 
Net income (loss)
 
 
 
 
 
 
 
 
 
 
Common stock
.02

 
.02

 
(.01
)
 
.01

 
(3.05
)
 
Class B common stock
N/A

 
N/A

 
N/A

 
N/A

 
(1.24
)
 
Cash dividends per share:
 
 
 
 
 
 
 
 
 
 
Common stock
.10

 
.08

 
.07

 
.06

 
.26

 
Class B common stock
N/A

 
N/A

 
N/A

 
N/A

 
.26

 
Weighted average diluted shares
     outstanding (6):
 
 
 
 
 
 
 
 
 
 
Common stock
392.1

 
407.2

 
427.2

 
466.7

 
137.7

 
Class B common stock
N/A

 
N/A

 
N/A

 
N/A

 
48.0

 
 
 
 
 
 
 
 
 
 
 
 
 
December 30, 2012
 
January 1, 2012
 
January 2, 2011
 
January 3,
2010
 
December 28,
2008 (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In Millions)
 
 
 
 
 
Working capital (deficiency)
$
423.0

 
$
398.7

 
$
333.3

 
$
403.8

 
$
(121.7
)
 
Properties
1,250.3

 
1,192.2

 
1,551.3

 
1,619.2

 
1,770.4

 
Total assets
4,303.2

 
4,289.1

 
4,732.7

 
4,975.4

 
4,645.6

 
Long-term debt, including
     current portion
1,457.6

 
1,357.0

 
1,572.4

 
1,522.9

 
1,111.6

 
Stockholders’ equity
1,985.9

 
1,996.1

 
2,163.2

 
2,336.3

 
2,383.4

 
_______________

(1)
The Wendy’s Company reports on a fiscal year consisting of 52 or 53 weeks ending on the Sunday closest to December 31. Except for the 2009 fiscal year, which contained 53 weeks, each of The Wendy’s Company’s fiscal years presented above contained 52 weeks. All references to years relate to fiscal years rather than calendar years. The financial position and results of operations for Wendy’s are included commencing with the Wendy’s merger on September 29, 2008. Immediately prior to this merger, each share of our Class B common stock was converted into Class A common stock on a one for one basis. In connection with the May 28,

29


2009 amendment and restatement of The Wendy’s Company’s Certificate of Incorporation, The Wendy’s Company’s former Class A common stock is now referred to as “Common Stock.”

(2)
On July 4, 2011, Wendy’s Restaurants completed the sale of 100% of the common stock of its then wholly owned subsidiary, Arby’s Restaurant Group, Inc. (“Arby’s”). Arby’s operating results for all periods presented through its July 4, 2011 date of sale are classified as discontinued operations. Balance sheet information for all periods prior to January 1, 2012 includes Arby’s.

(3)
As of December 29, 2008, The Wendy’s Company adopted new accounting guidance related to non-controlling interests (formerly referred to as minority interests). This adoption resulted in the retrospective reclassification of minority interests of $0.1 million from its former presentation as a liability to “Stockholders’ equity” in 2008. Income attributable to non-controlling interests in 2008 was not material.

(4)
Income from discontinued operations in 2012 included certain post-closing Arby’s related transactions, net of income taxes, of $1.5 million. Loss from discontinued operations in 2011 also included a loss on disposal, net of income taxes, of $8.8 million. Loss from discontinued operations, net of income taxes, in 2009 and 2008 also included income from discontinued operations, net of income taxes, of our former premium beverage and soft drink concentrate business segment and our former utility and municipal services and refrigeration business segment of $1.6 million and $2.2 million, respectively.

(5)
For the purposes of calculating loss per share amount for 2008, loss was allocated between The Wendy’s Company Class A common stock and The Wendy’s Company Class B common stock proportionately based on weighted average basic shares outstanding.

(6)
The weighted average number of shares used in the calculation of diluted income per share in 2009 through 2012 consists of the weighted average basic shares outstanding for common stock and potential shares of common stock reflecting the effect of 0.5 million, 0.9 million, 2.0 million and 1.9 million dilutive stock options and restricted shares for 2009, 2010, 2011 and 2012, respectively. The weighted average number of shares used in the calculation of diluted loss per share for 2008 is the same as basic loss per share since all potentially dilutive securities would have had an antidilutive effect based on the loss from continuing operations.

(7)
Reflects certain significant charges and gains recorded during 2012 as follows: $62.1 million charged to operating profit, consisting of $41.0 million for facilities relocation costs and other transactions, including costs for severance, relocation and other items associated with the sale of Arby’s and relocation of the Company’s Atlanta restaurant support center to Ohio and the discontinuation of the breakfast daypart at certain restaurants and $21.1 million for impairment of long-lived assets other than goodwill; $38.4 million, net of income taxes, charged to income from continuing operations and net income related to these charges; $46.5 million, net of income taxes, charged to income from continuing operations and net income related to costs incurred for the early extinguishment of debt; and an $18.0 million gain, net of income taxes, recognized in income from continuing operations and net income in connection with the sale of our investment in Jurlique International Pty Ltd. (“Jurlique”). As a result of the sale of our investment in Jurlique, we have reflected net income attributable to noncontrolling interests of $2.4 million, net of income taxes, which is included in income from continuing operations and excluded from net income attributable to The Wendy’s Company.

(8)
Reflects certain significant charges recorded during 2011 as follows: $58.6 million charged to operating profit, consisting of $45.7 million for transaction related and other costs for severance, relocation and other items associated with the sale of Arby’s and the relocation of the Company’s Atlanta restaurant support center to Ohio and $12.9 million for impairment of long-lived assets other than goodwill; and $36.4 million, net of income taxes, charged to income from continuing operations and net income related to these charges.

(9)
Reflects certain significant charges recorded during 2010 as follows: $26.3 million charged to operating profit for impairment of long-lived assets other than goodwill; $16.3 million, net of income taxes, charged to income from continuing operations and net loss related to this charge; and $16.2 million, net of income taxes, charged to income from continuing operations and net loss related to costs incurred for the early extinguishment of debt.

(10)
Reflects a significant charge recorded during 2009 of $25.6 million charged to operating profit for impairment of long-lived assets other than goodwill and $15.9 million, net of income taxes, charged to income from continuing operations and net income related to this charge.

(11)
Reflects a significant charge recorded during 2008 of $92.4 million, net of income taxes, charged to loss from continuing operations and net loss for other than temporary losses on investments.

30


Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of The Wendy’s Company (“The Wendy’s Company” and, together with its subsidiaries, the “Company,” “we,” “us,” or “our”) should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere within this report.  Certain statements we make under this Item 7 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995.  See “Special Note Regarding Forward-Looking Statements and Projections” in “Part I” preceding “Item 1 - Business.”  You should consider our forward-looking statements in light of the risks discussed under the heading “Risk Factors” in Item 1A above, as well as our consolidated financial statements, related notes and other financial information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission.

The Wendy’s Company is the parent company of its 100% owned subsidiary holding company, Wendy’s Restaurants, LLC (“Wendy’s Restaurants”). On July 4, 2011, Wendy’s Restaurants completed the sale of 100% of the common stock of its then wholly owned subsidiary, Arby’s Restaurant Group, Inc. (“Arby’s”). See “Executive Overview - Sale of Arby’s” for more information on the sale of Arby’s. Arby’s operating results for all periods presented through its July 4, 2011 date of sale are classified as discontinued operations in the accompanying consolidated statements of operations. After this sale, the principal 100% owned subsidiary of Wendy’s Restaurants is Wendy’s International, Inc. (“Wendy’s”) and its subsidiaries. Wendy’s franchises and operates company-owned Wendy’s® quick service restaurants specializing in hamburger sandwiches throughout North America (defined as the United States of America (the “U.S.”) and Canada). Wendy’s also has franchised restaurants in 26 foreign countries and U.S. territories.

The Company manages and internally reports its business geographically. The operation and franchising of Wendy’s restaurants in North America comprises virtually all of our current operations and represents a single reportable segment. The revenues and operating results of Wendy’s restaurants outside of North America are not material. The results of operations discussed below may not necessarily be indicative of future results.

Executive Overview

Sale of Arby’s

On July 4, 2011, Wendy’s Restaurants completed the sale of 100% of the common stock of Arby’s to ARG IH Corporation (“Buyer”), a wholly owned subsidiary of ARG Holding Corporation (“Buyer Parent”), for $130.0 million 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 $19.0 million. Buyer and Buyer Parent were formed for purposes of this transaction. The Buyer also assumed approximately $190.0 million of Arby’s debt, consisting primarily of capital lease and sale-leaseback obligations.
The Company recorded a pre-tax loss on disposal of Arby’s of $5.2 million during the year ended January 1, 2012, which included the effect of the valuation of our indirect retained interest ($19.0 million), transaction closing costs ($11.5 million) and post closing purchase price adjustments primarily related to working capital ($14.8 million). The Company recognized income tax expense associated with the loss on disposal of $3.6 million during the year ended January 1, 2012. This income tax expense was comprised of (1) an income tax benefit of $1.9 million on the pre-tax loss on disposal and (2) income tax expense of $5.5 million due to a permanent difference between the book and tax basis of Arby’s goodwill. The Company recorded net income from discontinued operations of $1.5 million for the year ended December 30, 2012, which included certain post-closing Arby’s related transactions.

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 provided and was reimbursed for continuing corporate and shared services to Buyer for a limited period of time; such services were completed in the fourth quarter of 2011.
During 2012, we received a $4.6 million dividend from our investment in Arby’s which was included in “Investment income, net.”


31


Our Continuing Business

As of December 30, 2012, the Wendy’s restaurant system was comprised of 6,560 restaurants, of which 1,427 were owned and operated by the Company. Our company-owned restaurants are located principally in the U.S. and to a lesser extent in Canada.

Wendy’s operating results have been impacted by a number of external factors, including high unemployment, negative general economic trends and intense price competition, as well as increased commodity costs in 2012 and 2011. Increased commodity costs negatively affected our cost of food and paper in those years.

Wendy’s long-term growth opportunities include improving our North America business by elevating the total customer experience through continuing core menu improvement, step-change product innovation and focused execution of operational excellence and brand positioning, which will be supported by (1) investing in our Image Activation program, which includes innovative exterior and interior restaurant designs for our new and reimaged restaurants, (2) employing financial strategies to improve our net income and earnings per share and (3) building the brand worldwide.

Wendy’s revenues for 2012 include: (1) $2,129.3 million of sales at company-owned restaurants, (2) $69.0 million of sales from our company-owned bakery, (3) $282.5 million of royalty income from franchisees and (4) $24.4 million of other franchise-related revenue and other revenues. Substantially all of our Wendy’s royalty agreements provided for royalties of 4.0% of franchise revenues for the year ended December 30, 2012.

Key Business Measures

We track our results of operations and manage our business using the following key business measures:
 
Same-Store Sales
Since the first quarter of 2012, we have been reporting Wendy’s same-store sales commencing after new restaurants have been open for at least 15 continuous months and after remodeled restaurants have been reopened for three continuous months (the “New Method”). Prior thereto, the calculation of same-store sales commenced after a restaurant had been open for at least 15 continuous months and as of the beginning of the previous fiscal year (the “Old Method”). The tables summarizing the results of operations below provide the same-store sales percent change using the New Method, as well as the Old Method. The New Method is consistent with the metric 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 and other.  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.
    
Credit Agreement

As further described in “Liquidity and Capital Resources - 2012 Credit Agreement” below, on May 15, 2012, Wendy’s entered into a Credit Agreement, as amended (the “Credit Agreement”), which includes a senior secured term loan facility (the “Term Loan”) of $1,125.0 million and a senior secured revolving credit facility of $200.0 million. The Company recognized losses on the early extinguishment of debt of $75.1 million for the year ended December 30, 2012 related to the repayment of debt from the proceeds of the Term Loan draws on July 16, 2012 and May 15, 2012. The Credit Agreement replaced the $650.0 million credit agreement and the amended senior secured term loan (the “2010 Term Loan”) executed in 2010.

Related Party Transactions

Supply Chain Relationship Agreement
    
During the fourth quarter of 2009, Wendy’s entered into a purchasing co-op relationship agreement (the “Wendy’s Co-op”) with its franchisees to establish Quality Supply Chain Co-op, Inc. (“QSCC”).  QSCC manages, for the Wendy’s system in the U.S. and Canada, contracts for the purchase and distribution of food, proprietary paper, operating supplies and equipment under national contracts with pricing based upon total system volume.  

32


QSCC’s supply chain management facilitates continuity of supply and provides consolidated purchasing efficiencies while monitoring and seeking to minimize possible obsolete inventory throughout the Wendy’s supply chain in the U.S. and Canada. Prior to 2010, the system’s purchasing function was performed and paid for by Wendy’s. In order to facilitate the orderly transition of the 2010 purchasing function for operations in the U.S. and Canada, Wendy’s transferred certain contracts, assets and certain Wendy’s purchasing employees to QSCC in 2010.  Pursuant to the terms of the Wendy’s Co-op, Wendy’s expensed $15.5 million in 2009 for payments to QSCC required over an 18 month period through May 2011 in order to provide funding for start-up costs, operating expenses and cash reserves. Wendy’s made such payments of $0.3 million and $15.2 million in 2011 and 2010, respectively. In connection with the ongoing operations of QSCC during 2010, QSCC reimbursed Wendy’s $0.9 million for amounts Wendy’s had paid primarily for payroll-related expenses for certain Canadian QSCC purchasing employees.
  
Since the third quarter of 2010, all QSCC members (including Wendy’s) pay sourcing fees to third party vendors on products which are sourced through QSCC. Such sourcing fees are remitted by these vendors to QSCC and are the primary means of funding QSCC’s operations. Should QSCC’s sourcing fees exceed its expected needs, QSCC’s board of directors may return some or all of the excess to its members in the form of a patronage dividend. Wendy’s recorded its share of patronage dividends of $2.5 million, $2.0 million and $0.3 million in 2012, 2011 and 2010, respectively, which are included as a reduction of “Cost of sales.”

Effective January 4, 2010, QSCC leased 9,333 square feet of office space from Wendy’s. Effective January 1, 2011, Wendy’s and QSCC entered into a lease amendment which increased the office space leased to QSCC to 14,333 square feet for a one year period for a revised annual base rental of approximately $0.2 million with five one-year renewal options, three of which are currently remaining.
    
Strategic Sourcing Group Agreement
    
On April 5, 2010, QSCC and the Arby’s independent purchasing cooperative (“ARCOP”) in consultation with Wendy’s Restaurants, established Strategic Sourcing Group Co-op, LLC (“SSG”). SSG was formed to manage and operate purchasing programs for certain non-perishable goods, equipment and services. Wendy’s Restaurants had committed to pay approximately $5.1 million of SSG expenses, which were expensed in 2010 and included in “General and administrative,” and were to be paid over a 24 month period through March 2012. However, in anticipation of the sale of Arby’s, effective April 2011, SSG was dissolved and its activities were transferred to QSCC and ARCOP and the remaining accrued commitment of $2.3 million was reversed and credited to “General and administrative.”

Noncontrolling Interests in Jurl Holdings, LLC
 
Jurl Holdings, LLC (“Jurl”), a 99.7% owned subsidiary, held our approximately 11% cost method investment in Jurlique International Pty Ltd. (“Jurlique”), an Australian manufacturer of skin care products. Prior to 2009, we had determined that all of our then remaining $8.5 million investment in Jurlique was impaired. On February 2, 2012, Jurl completed the sale of our investment in Jurlique for which we received proceeds of $27.3 million, net of the amount held in escrow. The amount held in escrow as of December 30, 2012 was $3.4 million, which was adjusted for foreign currency translation and was included in “Deferred costs and other assets.” In connection with the anticipated proceeds of the sale and in order to protect ourselves from a decrease in the Australian dollar through the closing date, we entered into a foreign currency related derivative transaction for an equivalent notional amount in U.S. dollars of the expected proceeds of A$28.5 million. We recorded a gain on sale of this investment of $27.4 million, which included a loss of $2.9 million on the settlement of the derivative transaction discussed above. The gain was included in “Investment income, net” in our consolidated statement of operations.

We have reflected net income attributable to noncontrolling interests of $2.4 million, net of an income tax benefit of $1.3 million, for the year ended December 30, 2012 in connection with the equity and profit interests discussed below. The net assets and liabilities of the subsidiary that held the investment were not material to the consolidated financial statements. Therefore, the noncontrolling interest in those assets and liabilities was not previously reported separately. As a result of this sale and distributions to the minority shareholders, there are no remaining noncontrolling interests in this consolidated subsidiary.

Prior to 2009 when our predecessor entity was a diversified company active in investments, we had provided our Chairman, who was also our then Chief Executive Officer, and our Vice Chairman, who was our then President and Chief Operating Officer (the “Former Executives”), and certain other former employees, equity and profit interests in Jurl. In connection with the gain on sale of Jurlique, we distributed, based on the related agreement, approximately $3.7 million to Jurl’s minority shareholders, including approximately $2.3 million to the Former Executives.


33


Services Agreement
    
The Wendy’s Company and the Management Company entered into a services agreement (the “Services Agreement”), which commenced on July 1, 2009 and expired on June 30, 2011. Under the Services Agreement, the Management Company assisted us with strategic merger and acquisition consultation, corporate finance and investment banking services and related legal matters. The Wendy’s Company paid approximately $2.5 million in 2010 in fees for corporate finance advisory services under the Services Agreement in connection with the negotiation and execution of the $650.0 million credit agreement in 2010 and the issuance of the Wendy’s Restaurants 10.0% Senior Notes (the “Senior Notes”) in 2009. In addition, The Wendy’s Company paid the Management Company a service fee of $0.25 million per quarter, in connection with the Services Agreement until it expired on June 30, 2011.

Sublease of New York Office Space
    
In July 2008 and July 2007, The Wendy’s Company entered into agreements under which the Management Company subleased (the “Subleases”) office space on two of the floors of the Company’s former New York headquarters.  During the second quarter of 2010, The Wendy’s 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 canceled in exchange for a reduction in rent.  Under the terms of the amended sublease, which expired in May 2012, the Management Company paid rent to The Wendy’s Company in an amount that covered substantially all of the Company’s rent obligations under the prime lease for the subleased space. 

Liquidation Services Agreement
    
On June 10, 2009, The Wendy’s Company and the Management Company entered into a liquidation services agreement (the “Liquidation Services Agreement”) pursuant to which the Management Company assisted us in the sale, liquidation or other disposition of our cost investments and the series A senior notes that we received from Deerfield Capital Corp. (the “DFR Notes”).  The Liquidation Services Agreement required The Wendy’s Company to pay the Management Company a fee of $0.9 million in two installments in June 2009 and 2010, which was deferred and amortized through its June 30, 2011 expiration date.

Aircraft Lease Agreements

In June 2009, The Wendy’s Company and TASCO, LLC (an affiliate of the Management Company) (“TASCO”) entered into an aircraft lease agreement (the “Aircraft Lease Agreement”) to lease a company-owned aircraft.  The Aircraft Lease Agreement originally provided that The Wendy’s Company would lease such company-owned aircraft to TASCO from July 1, 2009 until June 30, 2010.  On June 24, 2010, The Wendy’s Company and TASCO renewed the Aircraft Lease Agreement for an additional one year period (expiring on June 30, 2011). Under the Aircraft Lease Agreement, TASCO paid $10,000 per month for such aircraft plus substantially all operating costs of the aircraft including all costs of fuel, inspection, servicing and certain storage, as well as operational and flight crew costs relating to the operation of the aircraft, and all transit maintenance costs and other maintenance costs required as a result of TASCO’s usage of the aircraft. The Wendy’s Company continued to be responsible for calendar-based maintenance and any extraordinary and unscheduled repairs and/or maintenance for the aircraft, as well as insurance and other costs.

On June 29, 2011, The Wendy’s Company and TASCO entered into an agreement to extend the Aircraft Lease Agreement for an additional one year period (expiring on June 30, 2012) and an increased monthly rent of $13,000. On June 30, 2012, The Wendy’s Company and TASCO entered into an extension of that lease agreement that extended the lease term to July 31, 2012 and effective as of August 1, 2012, entered into an amended and restated aircraft lease agreement (the “2012 Lease”) that will expire on January 5, 2014. Under the 2012 Lease, all expenses related to the ownership, maintenance and operation of the aircraft will be paid by TASCO, subject to the limitation that if the amount of annual ongoing maintenance, hangar, insurance and other expenses, or the estimated amount of other scheduled maintenance expenses, exceeds the amounts stated in the 2012 Lease, then TASCO can either pay such amounts or terminate the 2012 Lease. In addition, if extraordinary and/or unscheduled repairs and/or maintenance for the aircraft become necessary and the estimated cost thereof exceeds the amount stated in the 2012 Lease, then TASCO can either pay such amounts or terminate the 2012 Lease. In the event of termination, TASCO will not be obligated to perform or pay for such repairs and/or maintenance following the date of termination.


34


Franchisee Incentive Programs

Franchise Image Activation Incentive Program

In order to encourage franchisees to participate in Wendy’s Image Activation program, which includes innovative exterior and interior restaurant designs for new and reimaged restaurants, Wendy’s initiated a cash incentive program for franchisees during the third quarter of 2012. In January 2013, the program was expanded to include variable cash incentives for Tier 1, 2, and 3 remodels and to allow for a maximum of $0.1 million each, for up to three incentives per franchisee. The cash incentive program is for the reimaging of restaurants completed in 2013 and totals $10.0 million.

North America Incentive Program

In order to promote new unit development, Wendy’s has established a franchisee assistance program for its North American franchisees that provides (with certain exceptions) for reduced technical assistance fees and a sliding scale of royalties for the first two years of operation for qualifying locations opened between April 1, 2011 and December 31, 2013. For the years ended December 30, 2012 and January 1, 2012, the effect on franchise revenues was not material and we do not expect the effect on future franchise revenues to be material.

Canadian Lease Guarantee Program

Wendy’s Canadian subsidiary has established a lease guarantee program to promote new franchisee unit development for up to an aggregate of C$5.0 million for periods of up to five years. Franchisees pay the Canadian subsidiary a nominal fee for the guarantee.

Japan Joint Venture Guarantee

In 2012, Wendy’s (1) provided a guarantee to certain lenders to our joint venture in Japan (the “Japan JV”) for which our joint venture partners have agreed, should it become necessary, to reimburse and otherwise indemnify us for their 51% share of the guarantee and (2) agreed to reimburse and otherwise indemnify our joint venture partners for our 49% share of the guarantee by our joint venture partners of a line of credit granted by a different lender to the Japan JV to fund working capital requirements. As of December 30, 2012, our portion of these contingent obligations totaled approximately $3.0 million based upon then current rates of exchange. The fair value of our guarantees is immaterial.

In early 2013, the joint venture partners agreed on a plan to finance anticipated future cash requirements of the Japan JV. As determined by the amount of future capital contributions by each of the partners, Wendy’s may become the majority owner of the Japan JV. The Japan JV and the effect of the noncontrolling interest in the Japan JV would then be included in the Wendy’s consolidated financial statements from the date that Wendy’s became the majority owner, or otherwise assumed day-to-day control of the Japan JV’s operations.

Our obligations, including the funding of anticipated future cash requirements of the Japan JV of approximately $3.0 million, could total up to approximately $8.0 million if our joint venture partners are unable to perform their reimbursement and indemnity obligations to us.

Presentation of Financial Information

The Company’s fiscal reporting periods consist of 52 or 53 weeks ending on the Sunday closest to December 31 and are referred to herein as (1) “the year ended December 30, 2012” or “2012,” (2) “the year ended January 1, 2012” or “2011,” and (3) “the year ended January 2, 2011” or “2010,” all of which consisted of 52 weeks. All references to years and quarters relate to fiscal periods rather than calendar periods.

35


Results of Operations

As a result of the sale of Arby’s as discussed above in “Executive Overview - Sale of Arby’s,” Arby’s results of operations for all periods presented and the loss on sale have been included in “Net income (loss) from discontinued operations” in the table below.

The tables included throughout Results of Operations set forth in millions the Company’s consolidated results of operations for the years ended December 30, 2012, January 1, 2012 and January 2, 2011 (except company-owned average unit volumes, which are in thousands):
 
2012
 
2011
 
2010
 
Amount
 
Change
 
Amount
 
Change
 
Amount
Revenues:
 
 
 
 
 
 
 
 
 
Sales
$
2,198.3

 
$
71.7

 
$
2,126.6

 
$
47.5

 
$
2,079.1

Franchise revenues
306.9

 
2.1

 
304.8

 
8.5

 
296.3

 
2,505.2

 
73.8

 
2,431.4

 
56.0

 
2,375.4

Costs and expenses:
 
 
 
 
 

 
 
 
 
Cost of sales
1,881.2

 
65.1

 
1,816.1

 
59.1

 
1,757.0

General and administrative
287.8

 
(4.6
)
 
292.4

 
(19.1
)
 
311.5

Depreciation and amortization
147.0

 
24.0

 
123.0

 
(3.8
)
 
126.8

Impairment of long-lived assets
21.1

 
8.2

 
12.9

 
(13.4
)
 
26.3

Facilities relocation costs and other transactions
41.0

 
(4.7
)
 
45.7

 
45.7

 

Other operating expense, net
4.4

 
0.2

 
4.2

 
0.8

 
3.4

 
2,382.5

 
88.2

 
2,294.3

 
69.3

 
2,225.0

Operating profit
122.7

 
(14.4
)
 
137.1

 
(13.3
)
 
150.4

Interest expense
(98.6
)
 
15.5

 
(114.1
)
 
4.3

 
(118.4
)
Loss on early extinguishment of debt
(75.1
)
 
(75.1
)
 

 
26.2

 
(26.2
)
Investment income, net
36.3

 
35.8

 
0.5

 
(4.8
)
 
5.3

Other income, net
1.6

 
0.7

 
0.9

 
(1.6
)
 
2.5

(Loss) income from continuing operations
before income taxes and noncontrolling
      interests
(13.1
)
 
(37.5
)
 
24.4

 
10.8

 
13.6

Benefit from (provision for) income taxes
21.1

 
27.6

 
(6.5
)
 
(11.0
)
 
4.5

Income from continuing operations
8.0

 
(9.9
)
 
17.9

 
(0.2
)
 
18.1

Net income (loss) from discontinued
     operations
1.5

 
9.5

 
(8.0
)
 
14.4

 
(22.4
)
Net income (loss)
9.5

 
(0.4
)
 
9.9

 
14.2

 
(4.3
)
Net income attributable to noncontrolling
      interests
(2.4
)
 
(2.4
)
 

 

 

Net income (loss) attributable to The
      Wendy’s Company
$
7.1

 
$
(2.8
)
 
$
9.9

 
$
14.2

 
$
(4.3
)

36


 
 
 
 
 
 
 
 
 
 
 
 
 
2012
 
 
 
2011
 
 
 
2010
 
 
Sales:
 
 
 
 
 
 
 
 
 
 
 
Wendy’s
$
2,129.3

 
 
 
$
2,050.1

 
 
 
$
1,980.6

 
 
Bakery and other (a)
69.0

 
 
 
76.5

 
 
 
98.5

 
 
Total sales
$
2,198.3

 
 
 
$
2,126.6

 
 
 
$
2,079.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
% of 
Sales
 
 
 
% of 
Sales
 
 
 
% of 
Sales
Cost of sales:
 
 
 
 
 
 
 
 
 
 
 
Wendy’s
 
 
 
 
 
 
 
 
 
 
 
Food and paper
$
707.3

 
33.2%
 
$
679.5

 
33.1%
 
$
638.8

 
32.2
%
Restaurant labor
641.3

 
30.1%
 
613.2

 
29.9%
 
590.0

 
29.8
%
Occupancy, advertising and other
      operating costs
483.6

 
22.7%
 
470.6

 
23.0%
 
458.6

 
23.2
%
Total cost of sales
1,832.2

 
86.0%
 
1,763.3

 
86.0%
 
1,687.4

 
85.2
%
Bakery and other (a)
49.0

 
n/m
 
52.8

 
n/m 
 
69.6

 
n/m 
Total cost of sales
$
1,881.2

 
85.6%
 
$
1,816.1

 
85.4%
 
$
1,757.0

 
84.5
%

 
2012
 
2011
 
2010
Margin $:
 
 
 
 
 
Wendy’s
$
297.1

 
$
286.8

 
$
293.2

Bakery and other (a)
20.0

 
23.7

 
28.9

Total margin
$
317.1

 
$
310.5

 
$
322.1


 
 
 
 
 
Wendy’s restaurant margin %
14.0
%
 
14.0
%
 
14.8
%
________________

(a)
During the first quarter of 2011, QSCC began managing the operations for kids’ meal promotion items sold to franchisees.

 
 
New Method
 
Old Method
 
 
2012
 
2011
 
2010
 
2012
 
2011
 
2010
Wendy’s restaurant statistics:
 
 
 
 
 
 
 
 
 
 
 
 
North America same-store sales:
 
 
 
 
 
 
 
 
 
 
 
 
Company-owned restaurants
 
1.6
%
 
2.0
%
 
(1.7
)%
 
1.5
%
 
2.0
%
 
(1.7
)%
Franchised restaurants
 
1.6
%
 
1.9
%
 
(0.3
)%
 
1.6
%
 
1.9
%
 
(0.3
)%
Systemwide
 
1.6
%
 
1.9
%
 
(0.6
)%
 
1.5
%
 
1.9
%
 
(0.6
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Total same-store sales:
 
 
 
 
 
 
 
 
 
 
 
 
Company-owned restaurants
 
1.6
%
 
2.0
%
 
(1.7
)%
 
1.5
%
 
2.0
%
 
(1.7
)%
Franchised restaurants (a)
 
1.7
%
 
2.0
%
 
(0.3
)%
 
1.6
%
 
2.0
%
 
(0.3
)%
Systemwide (a)
 
1.7
%
 
2.0
%
 
(0.6
)%
 
1.6
%
 
2.0
%
 
(0.6
)%
________________

(a)
Includes international franchised restaurants same-store sales.


37


 
Company-owned
 
Franchised
 
Systemwide
 
Restaurant count:
 
 
 
 
 
 
Restaurant count at January 2, 2011
1,394

 
5,182

 
6,576

 
Opened
20

 
69

 
89

 
Closed
(15
)
 
(56
)
 
(71
)
 
Net purchased from (sold by) franchisees
18

 
(18
)
 

 
Restaurant count at January 1, 2012
1,417

 
5,177

 
6,594

 
Opened
16

 
85

 
101

 
Closed
(32
)
 
(103
)
 
(135
)
 
Net purchased from (sold by) franchisees
26

 
(26
)
 

 
Restaurant count at December 30, 2012
1,427

 
5,133

 
6,560

 

 
2012
 
2011
 
2010
 
Company-owned average unit volumes:
 
 
 
 
 
 
Wendy’s
$
1,483.8

 
$
1,456.4

 
$
1,417.8

 

Sales
Change
 
2012
 
2011
Wendy’s
$
79.2

 
$
69.5

Bakery and other
(7.5
)
 
(22.0
)
 
$
71.7

 
$
47.5


The increase in sales in 2012 was partially due to an increase in our average per customer check amount, in part offset by a decrease in customer transactions throughout the majority of 2012. Our average per customer check amount increased in 2012 primarily due to strategic price increases on our menu items and, to a lesser extent, the composition of our sales which included more premium products in 2012. Wendy’s company-owned restaurants opened or acquired subsequent to January 1, 2012 resulted in incremental sales of $51.1 million in 2012, which were partially offset by a reduction in sales of $17.6 million from locations closed or sold after January 1, 2012. Sales were also negatively impacted by $2.7 million due to changes in Canadian foreign currency rates.

The increase in sales in 2011 was primarily due to increases in both our average per customer check amount and in the number of customer transactions. Our average per customer check increased primarily due to (1) increases in prices on certain menu items and (2) new product offerings with a higher menu price. Sales were also impacted by a $9.4 million benefit due to changes in Canadian foreign currency rates, which was partially offset by a decrease of $2.3 million in company-owned same-store sales primarily due to the effect of higher sales taxes in two Canadian provinces in the first half of 2011 as compared to the first half of 2010. Wendy’s company-owned restaurants opened or acquired subsequent to January 2, 2011 resulted in incremental sales of $24.5 million in 2011, which were partially offset by a reduction in sales of $9.7 million from locations closed or sold after January 2, 2011.
Franchise Revenues
Change
 
2012
 
2011
Franchise revenues
$
2.1

 
$
8.5


The increases in franchise revenues for 2012 and 2011 were primarily due to increases in franchise restaurant same-store sales of 1.7% and 2.0%, respectively. We believe franchised restaurant same-store sales for 2012 and 2011 were impacted by the same factors described above for company-owned restaurants.



38


Cost of Sales
Change
 
2012
 
2011
Food and paper
0.1
 %
 
0.9
 %
Restaurant labor
0.2
 %
 
0.1
 %
Occupancy, advertising and other operating costs
(0.3
)%
 
(0.2
)%
 
0.0
 %
 
0.8
 %

Cost of sales, as a percent of sales, remained flat in 2012 as compared to 2011. As a percent of sales, during 2012 we experienced a 1.0% increase in commodity costs and increased labor costs partially resulting from operating initiatives, including breakfast and Image Activation. As a percent of sales, these increases were offset by the effect of strategic price increases on our menu items, along with a decrease in breakfast advertising expenses.

As a percent of sales, the increase in food and paper costs in 2011 was primarily due to a 1.4% increase in commodity costs partially offset by the 0.8% effect of strategic price increases taken on certain menu items. The decrease in occupancy, advertising and other operating expenses as a percent of sales in 2011 was primarily due to a 0.4% decrease in insurance costs partially offset by a 0.2% increase in advertising expenses associated with the expansion of our breakfast daypart in additional markets during the first half of 2011.

General and Administrative
Change
 
2012
 
2011
Professional services
$
(8.2
)
 
$
7.1

Transition service agreement
6.8

 
(6.8
)
Franchise incentives
2.4

 
(6.8
)
SSG co-op formation & funding
2.3

 
(7.4
)
Integration costs

 
(5.5
)
Other, net
(7.9
)
 
0.3

 
$
(4.6
)
 
$
(19.1
)

The decrease in general and administrative expenses in 2012 was primarily due to a decrease in professional services resulting from a decrease in contract services for information technology and tax related projects. This decrease was partially offset by (1) the reimbursement of costs for continuing corporate and shared services incurred in the second half of 2011 in connection with the transition service agreement related to the sale of Arby’s (these services were completed during the fourth quarter of 2011), (2) the effect of the various franchise incentive programs in 2012 compared to 2011 and (3) the reversal of the accrual for the unpaid SSG funding commitment of $2.3 million during the first quarter of 2011.

The decrease in general and administrative expenses in 2011 was primarily due to (1) expenses related to the formation of SSG recorded in the first quarter of 2010 combined with the reversal of the accrual for the unpaid SSG funding commitment during the first quarter of 2011, (2) the effect of the various franchise incentive programs in 2011 compared to 2010, (3) reimbursement of costs incurred in the second half of 2011 in connection with the transition services agreement related to the sale of Arby’s; similar costs were incurred in the first half of 2011 and in 2010, which were not then subject to reimbursement and (4) the completion of the integration efforts in early 2010 related to the merger with Wendy’s. These decreases were partially offset by (1) reductions in legal reserves in 2010 for matters accrued in prior years combined with an increase in legal reserves in 2011 and (2) an increase in professional fees associated primarily with information technology and tax related projects.


39


Depreciation and Amortization
Change
 
2012
 
2011
Restaurants
$
21.7

 
$
(1.4
)
Other
2.3

 
(2.4
)
 
$
24.0

 
$
(3.8
)

The increase in restaurant depreciation and amortization in 2012 included (1) $11.6 million related to our Image Activation initiative which includes depreciation on new and reimaged restaurants and related depreciation on existing assets that were replaced, (2) $7.2 million related to other restaurant capital expenditures, including the effect from restaurants acquired from franchisees subsequent to 2011 and (3) $2.9 million related to point-of-sale system hardware purchased during 2012.

The decrease in depreciation and amortization in 2011 was primarily related to (1) previously impaired long-lived assets, (2) depreciation on properties in 2010 which have since been fully depreciated and (3) the transfer of certain corporate information technology equipment to Arby’s during the first half of 2011 (the depreciation of those assets is included in discontinued operations). Additionally, depreciation and amortization decreased due to the classification of a company-owned aircraft as held for sale during the second quarter of 2011 as no depreciation expense is recorded on assets held for sale.

Impairment of Long-Lived Assets
Change
 
2012
 
2011
Restaurants, primarily properties
$
6.6

 
$
(13.4
)
Aircraft
1.6

 

 
$
8.2

 
$
(13.4
)

The changes in impairment charges during 2012 and 2011 were primarily due to the level of impairment charges taken on properties at underperforming locations. Impairment charges primarily include charges on restaurant level assets resulting from a continued decline in operating performance of certain restaurants and additional charges for capital improvements in restaurants impaired in prior years which did not subsequently recover.

Also, as of the beginning of the second quarter of 2012, we reclassified a company-owned aircraft as held and used from its previous held for sale classification. During 2012, the Company recorded an impairment charge of $1.6 million on the company-owned aircraft. As of December 30, 2012, the carrying value of the aircraft, which reflects current market conditions, approximated its fair value and is included in “Properties.”

Facilities Relocation Costs and Other Transactions
Year Ended
 
2012
 
2011
Facilities relocation and other transition costs
$
29.0

 
$
5.5

Breakfast discontinuation
10.6

 

Arby’s transaction related costs
1.4

 
40.2

 
$
41.0

 
$
45.7


During 2012 and 2011, the Company had facilities relocation and other transition costs aggregating $29.0 million and $5.5 million, respectively, related to the relocation of the Atlanta restaurant support center to Ohio, which was substantially completed during 2012. Costs during both 2012 and 2011 primarily related to severance, retention and other payroll costs, and additionally in 2012, relocation, consulting and professional fees and costs associated with the closure of the Atlanta restaurant support center.

During the fourth quarter of 2012, the Company reflected costs totaling $10.6 million resulting from the discontinuation of the breakfast daypart at certain restaurants consisting primarily of (1) the remaining net carrying value of $5.3 million for certain breakfast equipment and (2) amounts advanced to franchisees of $3.5 million for breakfast equipment which will not be reimbursed.

During 2012 and 2011, the Company recorded transaction related costs aggregating $1.4 million and $40.2 million, respectively, as a result of the sale of Arby’s in July 2011. Costs expensed during 2011 primarily related to severance, retention and stock compensation primarily associated with the accelerated vesting of previously granted awards. Relocation and stock compensation

40


costs related to the relocation of a corporate executive are being amortized over a three year period in accordance with the terms of an agreement.

Interest Expense
Change
 
2012
 
2011
Senior Notes
$
(29.1
)
 
$
0.2

Amortization of deferred financing costs
(2.0
)
 
0.2

Term loans
15.2

 
1.8

Interest rate swaps
0.1

 
2.3

Wendy’s 6.25% senior notes

 
(7.7
)
Other, net
0.3

 
(1.1
)
 
$
(15.5
)
 
$
(4.3
)

The decrease in interest expense during 2012 was primarily due to the purchase and redemption of the Senior Notes outstanding in May and July 2012, respectively, as further discussed in “Liquidity and Capital Resources - 2012 Credit Agreement.” This decrease in interest expense was partially offset by the effect of higher comparative weighted average principal amounts outstanding under the term loans as partially offset by lower effective comparative interest rates on the term loans.

The decrease in interest expense in 2011 was primarily due to the redemption of the Wendy’s 6.25% senior notes in the second quarter of 2010 as partially offset by a $1.9 million gain on the cancellation of related interest rate swaps. Interest expense was also affected by higher comparative weighted average principal amounts on the then outstanding term loans as partially offset by lower effective comparative interest rates of the term loans.

Loss on Early Extinguishment of Debt

The loss on early extinguishment of debt in 2012 of $75.1 million consisted of (1) a $43.2 million premium payment required to redeem and purchase the Senior Notes, (2) $9.3 million for the write-off of the unaccreted discount on the Senior Notes, (3) $12.4 million for the write-off of deferred costs associated with the Senior Notes, (4) $1.7 million for the write-off of the unaccreted discount on the 2010 Term Loan and (5) $8.5 million for the write-off of deferred costs associated with the repayment of the 2010 Term Loan.

The loss on early extinguishment of debt in 2010 of $26.2 million 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 on the Wendy’s 6.25% senior notes and (3) $5.7 million for the write-off of deferred costs associated with the repayment of the Wendy’s Restaurants 2009 senior secured term loan.

Investment Income, Net
Change
 
2012
 
2011
Gain on sale of investments, net
$
27.5

 
$
0.1

Distributions, including dividends
8.3

 

Gain on DFR Notes

 
(4.9
)
 
$
35.8

 
$
(4.8
)

The increase in investment income in 2012 was primarily a result of recording a $27.4 million gain on the sale of our investment in Jurlique, which included a loss of $2.9 million on the related settlement of the derivative transaction discussed in Note 8 of the Financial Statements and Supplementary Data contained in Item 8 herein. In addition, we received a $4.6 million dividend from our investment in Arby’s during 2012.

The decrease in investment income in 2011 primarily related to the recognition of income of $4.9 million on the repayment and cancellation of the DFR Notes during 2010.


41


Benefit from (Provision for) Income Taxes
 
Change
 
2012
 
2011
Federal and state benefit on variance in (loss) income from continuing
     operations before income taxes and noncontrolling interests
$
23.1

 
$
(4.9
)
Foreign tax credit, net of tax on foreign earnings
(0.8
)
 
(6.5
)
Corrections related to prior years’ tax matters
7.6

 

Adjustments related to prior year tax matters
(2.2
)
 
0.9

Other
(0.1
)
 
(0.5
)
 
$
27.6

 
$
(11.0
)

Our income taxes in 2012, 2011 and 2010 were impacted by variations in income from continuing operations before income taxes and noncontrolling interests, adjusted for recurring items such as non-deductible expenses and state income taxes, as well as non-recurring discrete items. Discrete items may occur in any given year but are not consistent from year to year. Taxes changed as a result of the following discrete items: (1) certain corrections in 2012 related to tax matters in prior years for the effects of tax depreciation in states that do not follow federal law of $3.3 million, the effects of a one-time federal employment tax credit of $2.2 million and a correction to certain deferred tax assets and liabilities of $2.1 million, (2) adjustments related to prior year tax matters resulting from the recurring process of comparing the tax returns as filed to related tax provisions as compared to the prior year and (3) a 2010 tax benefit of foreign tax credits, net of tax on foreign earnings which did not recur.

Net Income (Loss) from Discontinued Operations

Net income (loss) from discontinued operations includes income from discontinued operations of $2.0 million and $0.8 million for the years ended December 30, 2012 and January 1, 2012, respectively, and a loss from discontinued operations of $22.4 million for the year ended January 2, 2011, net of a benefit from (provision for) income taxes of $1.0 million, $(0.9) million and $13.1 million, respectively. Net income (loss) from discontinued operations for the years ended December 30, 2012 and January 1, 2012 also includes a loss on disposal of $0.5 million and $8.8 million, respectively, net of a benefit from (provision for) income taxes of $0.3 million and $(3.6) million, respectively.

Net Income Attributable to Noncontrolling Interests

Jurl, a 99.7% owned subsidiary, completed the sale of our investment in Jurlique in February 2012.We have reflected net income attributable to noncontrolling interests of $2.4 million, net of an income tax benefit of $1.3 million, for the year ended December 30, 2012 in connection with the equity and profit interests discussed below. The net assets and liabilities of the subsidiary that held the investment were not material to the consolidated financial statements. Therefore, the noncontrolling interest in those assets and liabilities was not previously reported separately. As a result of this sale and distributions to the minority shareholders, there are no remaining noncontrolling interests in this consolidated subsidiary.

Prior to 2009 when our predecessor entity was a diversified company active in investments, we had provided the Former Executives and certain other former employees, equity and profit interests in Jurl. In connection with the gain on sale of Jurlique, we distributed, based on the related agreement, approximately $3.7 million to Jurl’s minority shareholders, including approximately $2.3 million to the Former Executives during the year ended December 30, 2012.

Outlook for 2013
Sales

We expect that sales will be favorably impacted primarily by improving our North America business by elevating the total customer experience through continuing core menu improvement, step-change product innovation and focused execution of operational excellence and brand positioning. We will support these growth opportunities through our Image Activation program which includes our new restaurants and the reimaging of approximately 100 restaurants during 2013. The net impact of new store openings and closings is not expected to have a significant impact on sales.


42


Franchise Revenues

We expect that the sales trends for franchised restaurants will continue to be generally impacted by factors described above under “Sales” related to the improvements in the North America business. We anticipate that our franchisees will reimage 100 restaurants during 2013. The net impact of new store openings and closings is not expected to have a significant impact on franchise revenues.

Cost of Sales

We expect cost of sales, as a percent of sales, will be favorably impacted by the same factors described above for sales and by a benefit from the discontinuation of the breakfast daypart at certain restaurants. However, we expect cost of sales, as a percentage of sales, to be negatively impacted by an increase in overall commodity costs.

Depreciation and Amortization

We expect our depreciation and amortization will increase in 2013 due to an increase in capital expenditures related primarily to our Image Activation program for new and reimaged restaurants and the depreciation of existing assets that will be replaced as part of our Image Activation program.

Interest Expense

We expect that our interest expense will decrease in 2013 due to the full year effect of the refinancing initiative completed in July 2012.
 
Liquidity and Capital Resources

The Company’s discussion below regarding its liquidity and capital resources includes the discontinued operations of Arby’s. Arby’s cash flows prior to its sale (for the period from January 3, 2011 through July 3, 2011 and for the year ended January 2, 2011) have been included in and not separately reported from our cash flows. The consolidated statements of cash flows for the years ended December 30, 2012 and January 1, 2012 also include the effects of the sale of Arby’s. The tables included throughout Liquidity and Capital Resources present dollars in millions.

Net Cash Provided by Operating Activities

2012 Compared with 2011

Cash provided by operating activities decreased $56.3 million during the year ended December 30, 2012 as compared to the year ended January 1, 2012, primarily due to the following:

a $54.0 million unfavorable impact in accrued expenses and other current liabilities for the comparable periods. This unfavorable impact was primarily due to (1) an increase in payments and a decrease in charges for Arby’s transaction related costs and facilities relocation and transition costs related to the relocation of the Company’s Atlanta restaurant support center to Ohio, (2) a decrease in interest expense and the corresponding accrual primarily due to the purchase and redemption of the Senior Notes, as further discussed below and (3) a decrease in accrued income taxes; and

a $20.6 million unfavorable impact in accounts payable for the comparable periods. This unfavorable impact was primarily due to (1) higher payments in 2012 in comparison to 2011 for capital expenditures accrued at the end of 2011 and 2010, respectively and (2) changes in accounts payable due to the timing of payments between the comparable periods.
  
These decreases were partially offset by increases in cash related to accounts and notes receivable of $6.7 million, prepaid expenses and other current assets of $6.2 million and a cash dividend received from our investment in Arby’s of $4.6 million in 2012.

Additionally, for the year ended December 30, 2012, the Company had the following significant sources and uses of cash other than from operating activities:

Proceeds from the sale of our cost investment in Jurlique of $27.3 million;
$40.6 million for the acquisition of franchised restaurants;

43


Cash capital expenditures totaling $197.6 million, including $71.9 million for reimaged and new Image Activation restaurants, $13.5 million for other remodeled and new restaurants, $28.0 million for restaurant point-of-sale equipment, $23.2 million for the construction of a new building at our corporate headquarters, in part related to the relocation of our Atlanta restaurant support center, and the renovation of portions of the corporate headquarters and $61.0 million for various capital projects;
Proceeds from the Term Loan of $1,113.8 million;
Repayments of $1,044.3 million of long-term debt, primarily related to the 2010 Term Loan and Senior Notes;
Financing cost payments related to the Credit Agreement;
Premium payments on the redemption/purchase of the Senior Notes of $43.2 million; and
Dividend payments of $39.0 million.

The net cash used in our business before the effect of exchange rate changes on cash was approximately $23.1 million.

2011 Compared with 2010

Cash provided by operating activities increased $20.5 million during the year ended January 1, 2012 as compared to the year ended January 2, 2011, primarily due to the following:

a $40.6 million favorable impact in accrued expenses and other current liabilities for the comparable periods. This favorable impact was primarily due to the following: (1) an increase in amounts accrued for termination, severance and relocation costs associated with the sale of Arby’s and the related plans for the relocation of the Company’s Atlanta restaurant support center to Ohio, (2) payments to QSCC in the first quarter of 2010 which were accrued in 2009, (3) a decrease in amounts paid in 2011 versus 2010 under incentive compensation plans for the 2010 and 2009 fiscal years, respectively and (4) a decrease in interest payments in 2011 compared to 2010, partially offset by a decrease in accrued interest expense both primarily due to the redemption of the Wendy’s 6.25% senior notes in the second quarter of 2010 and a $190.0 million decrease in long-term debt which was assumed by Buyer on July 4, 2011. These favorable changes were partially offset by a decrease in the current income tax provision due to variations in taxable income of continuing operations during the same comparable periods; and

a $27.2 million favorable impact in accounts payable resulting from an increase in accounts payable of $11.4 million during 2011 compared to a decrease in accounts payable of $15.8 million during 2010. The changes for 2011 and 2010 were primarily due to the following: (1) an increase in amounts payable for food purchases at Wendy’s as a result of higher sales trends in 2011 as compared to 2010, (2) a decrease in payments for expenses at Arby’s as a result of its sale on July 4, 2011, (3) amounts payable related to the Wendy’s annual convention held in the 2011 fourth quarter and (4) a decrease in payments for Wendy’s kids’ meal promotion items as the management for kids’ meal promotion items sold to franchisees was transferred to QSCC in the first quarter of 2011.

These increases were partially offset by a $9.1 million decrease to cash related to prepaid expenses and other current assets.

Additionally, for the year ended January 1, 2012, the Company had the following significant sources and uses of cash other than from operating activities:

Proceeds from the sale of Arby’s of $97.9 million, which is net of the following: Arby’s cash balance of $7.1 million at the sale date, customary purchase price adjustments primarily related to working capital and transaction closing costs paid through January 1, 2012;
Repayments of long-term debt of $38.7 million, including an excess cash flow prepayment of $24.9 million as required by the 2010 Term Loan;
Cash capital expenditures totaling $146.8 million, which included $27.5 million for the remodeling of restaurants, $23.9 million for the construction of new restaurants and $95.4 million for various capital projects;
Dividend payments of $32.4 million; and
Repurchases of common stock of $157.6 million, including commissions of $0.6 million.

The net cash used in our business before the effect of exchange rate changes on cash was approximately $36.1 million.


44


Sources and Uses of Cash for 2013

Our anticipated consolidated sources of cash and cash requirements for 2013 exclusive of operating cash flow requirements consist principally of:

Capital expenditures of approximately $245.0 million as discussed below in “Capital Expenditures;”
Potential restaurant acquisitions and dispositions;
The costs of any potential financing activities;
Quarterly cash dividends aggregating up to approximately $62.9 million as discussed below in “Dividends;” and
Potential stock repurchases of up to $100.0 million.
Based upon current levels of operations, the Company expects that cash flows from operations and available cash will provide sufficient liquidity to meet operating cash requirements for the next 12 months.

Capitalization
 
Year End
 
2012
Long-term debt, including current portion
$
1,457.6

Stockholders’ equity
1,985.9

 
$
3,443.5


The Wendy’s Company’s total capitalization at December 30, 2012 increased $90.4 million from $3,353.1 million at January 1, 2012 impacted principally by the following:

The completion of the Credit Agreement, as further discussed below, which resulted in additional debt from the $1,125.0 million Term Loan offset by the principal reductions of (1) the 2010 Term Loan of $467.8 million and (2) the redemption and purchase of the outstanding Senior Notes of $565.0 million; and
Dividends paid of $39.0 million.

Long-Term Debt, Including Current Portion
 
Year End
 
2012
Term Loan
$
1,114.8

6.20% senior notes
226.0

7% debentures
83.5

Capital lease obligations, excluding interest
32.6

Other
0.7

Total long-term debt, including current portion
$
1,457.6


Except as described below, there were no material changes to the terms of any debt obligations since January 1, 2012. See Note 12 of the Financial Statements and Supplementary Data contained in Item 8 herein, for further information related to our long-term debt obligations.

2012 Credit Agreement

On May 15, 2012, Wendy’s entered into a Credit Agreement, as amended, which includes a senior secured term loan facility of $1,125.0 million and a senior secured revolving credit facility of $200.0 million and contains provisions for an uncommitted increase of up to $275.0 million principal amount of the revolving credit facility and/or Term Loan subject to the satisfaction of certain conditions. The revolving credit facility includes a sub-facility for the issuance of up to $70.0 million of letters of credit.


45


The Term Loan was issued at 99.0% of the principal amount, representing an original issue discount of 1.0% resulting in net proceeds of $1,113.8 million with draws on May 15, 2012 and July 16, 2012. The discount of $11.3 million is being accreted and the related charge included in “Interest expense” through the maturity of the Term Loan.
The Term Loan is due not later than May 15, 2019 and amortizes in an amount equal to 1% per annum of the total principal amount outstanding, payable in quarterly installments which commenced on December 31, 2012, with the remaining balance payable on the maturity date. In addition, the Term Loan requires prepayments of principal amounts resulting from certain events and excess cash flow on an annual basis from Wendy’s as defined under the Credit Agreement. An excess cash flow payment was not required for fiscal 2012. The revolving credit facility expires not later than May 15, 2017. An unused commitment fee of 50 basis points per annum is payable quarterly on the average unused amount of the revolving credit facility until the maturity date. As of December 30, 2012, there were no amounts outstanding under the revolving credit facility, except for $20.3 million of letters of credit issued in the normal course of business.
The interest rate on the Term Loan and amounts borrowed under the revolving credit facility is based on the Eurodollar Rate as defined in the Credit Agreement (but not less than 1.25%), plus 3.50%, or a Base Rate, as defined in the Credit Agreement 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 4.75% as of December 30, 2012.
Wendy’s incurred $15.6 million in costs related to the Credit Agreement, which is being amortized to “Interest expense” through the maturity of the Term Loan utilizing the effective interest rate method.
Proceeds from the Term Loan were used (1) to repay all amounts outstanding under the 2010 Term Loan, (2) to redeem the Senior Notes in the amounts of $440.8 million aggregate principal at a redemption price of 107.5% of the principal amount in July 2012 and to purchase $124.2 million aggregate principal at a purchase price of 108.125% of the principal amount in May 2012, both plus accrued and unpaid interest and (3) to pay substantially all of the Credit Agreement fees and expenses.
The Company recognized losses on the early extinguishment of debt of $75.1 million for the year ended December 30, 2012 related to the repayment of debt from the proceeds of the Term Loan draws on July 16, 2012 and May 15, 2012.
The affirmative and negative covenants in the Credit Agreement include, among others, preservation of corporate existence; payment of taxes; 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 (1) a consolidated interest coverage ratio and (2) a consolidated senior secured leverage ratio. Wendy’s was in compliance with all covenants of the Credit Agreement as of December 30, 2012 and we expect to remain in compliance with all of these covenants for the next 12 months.
6.54% Aircraft Term Loan
During the first quarter of 2012, the Company made a $3.9 million prepayment on its aircraft financing facility to comply with a requirement that the outstanding principal balance be no more than 85% of the appraised value of the aircraft. On June 25, 2012, the Company voluntarily repaid the remaining outstanding principal, including accrued interest thereon related to this facility, totaling $6.7 million.


46


Contractual Obligations

The following table summarizes the expected payments under our outstanding contractual obligations at December 30, 2012:
 
 
Fiscal Years
 
 
2013
 
2014-2015
 
2016-2017
 
After 2017
 
Total
Long-term debt obligations (a)
 
$
79.7

 
$
381.3

 
$
139.0

 
$
1,297.3

 
$
1,897.3

Capital lease obligations (b)
 
4.4

 
9.3

 
8.2

 
43.8

 
65.7

Operating lease obligations (c)
 
66.4

 
113.1

 
99.9

 
642.5

 
921.9

Purchase obligations (d)
 
55.7

 
49.6

 
41.1

 
30.0

 
176.4

Other
 
7.4

 
1.5

 
0.9

 

 
9.8

Total (e)
 
$
213.6

 
$
554.8

 
$
289.1

 
$
2,013.6

 
$
3,071.1

_______________

(a)
Excludes capital lease obligations, which are shown separately in the table. The table includes interest of approximately $446.6 million. The table also reflects the effect of interest rate swaps which lowered our interest rate on our 6.20% Wendy’s senior notes. These amounts exclude the fair value adjustments related to certain debt assumed in the Wendy’s merger.

(b)
Excludes related sublease rental receipts of $8.9 million on capital lease obligations. The table includes interest of approximately $33.1 million for capital lease obligations.

(c)
Represents the minimum lease cash payments. Excludes aggregate related sublease rental receipts of $58.8 million.

(d)
Includes (1) $132.7 million for the remaining beverage purchase requirement under the previous beverage agreement as of December 30, 2012, (2) $22.1 million for capital expenditures, (3) $20.0 million for utility commitments and (4) $1.6 million of other purchase obligations. The Company entered into a new beverage agreement, effective January 1, 2013, which establishes a new contract term and, among other terms, revised pricing and usage requirements. Based on current pricing and the current ratio of usage at company-owned restaurants to franchised restaurants, our total beverage purchase requirement under the new agreement is estimated to be approximately $170.0