Introduction
Wendy’s/Arby’s Group, Inc. (“Wendy’s/Arby’s”) is the parent company of its 100% owned subsidiary holding company Wendy’s/Arby’s Restaurants, LLC (“Wendy’s/Arby’s Restaurants”). Wendy’s/Arby’s Restaurants is the parent company of Wendy’s International, Inc. (“Wendy’s”) and Arby’s Restaurant Group, Inc. (“Arby’s”), which are the owners and franchisors of the Wendy’s® and Arby’s® restaurant systems, respectively. As used in this report, unless the context requires otherwise, the term “Companies” refers to Wendy’s/Arby’s and its direct and indirect subsidiaries, including Wendy’s/Arby
217;s Restaurants.
As of January 2, 2011, the Wendy’s restaurant system was comprised of 6,576 restaurants, of which 1,394 were owned and operated by the Companies. As of January 2, 2011, the Arby’s restaurant system was comprised of 3,649 restaurants, of which 1,144 were owned and operated by the Companies. References in this Form 10-K to restaurants that we “own” or that are “company-owned” include owned and leased restaurants. Wendy’s/Arby’s corporate predecessor was incorporated in Ohio in 1929 and was reincorporated in Delaware in June 1994. Effective September 29, 2008, in conjunction with the merger with Wendy’s, Wendy’s/Arby’s corporate name was changed from Triarc Compan
ies, Inc. (“Triarc”) to Wendy’s/Arby’s Group, Inc. The Companies’ principal executive offices are located at 1155 Perimeter Center West, Atlanta, Georgia 30338, and their telephone number is (678) 514-4100. 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 the Wendy’s/Arby’s 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.wendysarbys.com. Information contained on that website is not part of this Annual Report on Form 10-K.
Merger with Wendy’s
On September 29, 2008, Triarc and Wendy’s completed their previously announced 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. The merger value of approximately $2.5 billion for financial reporting purposes is based on the 4.25 conversion factor of the Wendy’s outstanding shares as well as previously issued restricted stock awards, both at a value of $6.57 per share which represented the average closing market price of Triarc Class A common stock two days before and after the merger announcement date of April 24, 2008. Wendy’s shareholders held approximately 80%, in the aggregate, of Wendy’s/Arby’s outstanding Class A common stock immediately following the Wendy’s Merger. In addition, effective on the date of the Wendy’s Merger, WendyR
17;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.”
The Wendy’s and Arby’s brands continue to operate independently, with headquarters in Dublin, Ohio and Atlanta, Georgia, respectively. A consolidated support center is based in Atlanta, Georgia and oversees all public company responsibilities, as well as other shared service functions.
Fiscal Year
The Companies use a 52/53 week fiscal year convention whereby their 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, including 2009, the fourth quarter represents a 14-week period.
Business Segments
We operate in two business segments, Wendy’s and Arby’s. See Note 27 of the Financial Statements and Supplementary Data included in Item 8 herein, for financial information attributable to our business segments and geographic areas.
The Wendy’s Restaurant System
Wendy’s is the third largest restaurant franchising system in the United States specializing in the hamburger sandwich segment of the quick service restaurant industry. According to Nation’s Restaurant News, Wendy’s is the fourth largest quick service restaurant chain in the United States.
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 January 2, 2011, there were 6,576 Wendy’s restaurants in operation in North America and in 22 foreign countries (other than Canada) and United States territories. Of these restaurants, 1,394 were operated by Wendy’s and 5,182 by a total of 490 franchisees. 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.
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The revenues from our restaurant business are derived from three principal sources: (1) sales at company-owned restaurants; (2) sales of bakery items and kids’ meal promotional items to franchisees and others; and (3) franchise royalties received from all Wendy’s franchised restaurants.
Wendy’s is also a 50% partner in a Canadian restaurant real estate joint venture with Tim Hortons Inc. The joint venture owns Wendy’s/Tim Hortons combo units in Canada. As of January 2, 2011, there were 105 Wendy’s restaurants in operation that were owned by the joint venture. The Tim Hortons menu includes premium coffee, flavored cappuccinos, specialty teas, home-style soups, fresh sandwiches and fresh baked goods.
Wendy’s Restaurants
Wendy’s opened its first restaurant in Columbus, Ohio in 1969. During 2010, Wendy’s opened 9 new company-owned restaurants and closed 4 generally underperforming company-owned restaurants. In addition, Wendy’s sold 2 company-owned restaurants to its franchisees. During 2010, Wendy’s franchisees opened 69 new restaurants and closed 39 generally underperforming restaurants. In 2009, 71 franchised restaurants were closed in Japan at year-end upon the expiration of the related franchise agreement.
The following table sets forth the number of Wendy’s restaurants at the beginning and end of each year from 2008 to 2010:
2010
2009
2008
Restaurants open at beginning of period
Restaurants opened during period
Restaurants closed during period
Restaurants open at end of period
During the period from December 31, 2007, through January 2, 2011, 238 Wendy’s restaurants were opened and 307 generally underperforming Wendy’s restaurants were closed.
Operations
Each Wendy’s restaurant offers a relatively standard menu featuring hamburgers and 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, baked and French fried potatoes, freshly prepared salads, soft drinks, milk, Frosty™ desserts, floats and kids’ meals. In addition, the restaurants sell a variety of promotional products on a limited basis. Wendy’s has tested breakfast in certain markets and plans to expand its breakfast initiative in 2011.
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 64.9%, 64.6%, and 63.8% in 2010, 2009, and 2008 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 and kids’ meal toys, 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 other outside parties, including one distributor to the Arby’s system. At January 2, 2011, the Bakery supplied 709 restaurants operated by Wendy’s and 2,551 restaurants operated by franchisees. As of that date, the Bakery also directly supplied 10 Arby’s restaurants on a test basis. The Bakery also manufactures and sells some products to customers in the grocery and other food service businesses.
As of January 2, 2011, 5 independent processors (6 total production facilities) supplied all of Wendy’s hamburger in the United States. In addition, 5 independent processors (7 total production facilities) supplied all of Wendy’s chicken in the United States.
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.
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During the 2009 fourth quarter, Wendy’s entered into a purchasing co-op relationship agreement (the “Co-op Agreement”) to establish a new Wendy’s purchasing co-op, Quality Supply Chain Co-op, Inc. (“QSCC”). QSCC manages food and related product purchases and distribution services for the Wendy’s system in the United States and Canada. Through QSCC, Wendy’s and Wendy’s franchisees purchase food, proprietary paper and operating supplies 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 North America supply chain. The system’s purchasing function for 2009 and prior was performed and paid for by Wendy’s. In order to facilitate the orderly transition of the 2010 purchasing function for North America operations, Wendy’s transferred certain contracts, assets and certain Wendy’s purchasing employees to QSCC in the first quarter of 2010. Pursuant to the terms of the Co-op Agreement, Wendy’s was required to pay $15.5 million to QSCC over an 18 month period through May 2011 in order to provide funding for start-up costs, operating expenses and c
ash reserves. In addition to the initial funding by Wendy’s, since the third quarter of 2010 all QSCC members (including Wendy’s) began paying sourcing fees on products sourced through QSCC. Such sourcing fees will be the primary means of funding QSCC’s operations after the initial funding by Wendy’s is completed.
During the 2010 second quarter, QSCC and ARCOP, Inc. (“ARCOP”), Arby’s independent purchasing cooperative, in consultation with Wendy’s/Arby’s Restaurants, established the Strategic Sourcing Group Co-op, LLC (“SSG”). SSG was formed to manage and operate purchasing programs which combine the purchasing power of both Wendy’s and Arby’s company-owned and franchised restaurants to create buying efficiencies for certain non-perishable goods, equipment and services.
In order to facilitate the orderly transition of this purchasing function for the Companies’ North America operations, Wendy’s/Arby’s Restaurants transferred certain contracts, assets and certain Wendy’s/Arby’s Restaurants purchasing employees to SSG in the second quarter of 2010. Wendy’s/Arby’s Restaurants had committed to pay approximately $5.2 million of SSG expenses, which was expensed in 2010 and was to be paid over a 24 month period through March 2012. We made payments of $2.0 million in 2010.
Should a sale of Arby’s occur as discussed in “The Arby’s Restaurant System” herein, under the change of control provisions in the agreement that established SSG, the activities of SSG would be wound up. In the wind up process, the assets, personnel and functions of SSG would be transferred to QSCC and ARCOP as such parties and Wendy’s/Arby’s Restaurants agree. In contemplation of a possible sale, the parties are in discussion regarding the dissolution of SSG and transferring SSG’s assets, personnel and functions to QSCC and ARCOP.
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 2011 to 2020, while international trademarks and service marks have various durations of 10 to 15 years. Wendy’s generally intends to renew trademarks and ser
vice 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.